MUMBAI: Following the complete removal of 18 percent GST on retail life, health and accident cover insurance policies, some leading private insurers slashing the agent commission by 18 percent to pass on the entire tax benefits to customers, a move that was questioned by the distributors.
Agency/distributor commissions represent 15-20 percent of the Rs 40,000-50,000 crore retail insurance market. But the real reason for chopping agency commission is to help partly offset the loss from the non-availability of input tax credit (ITC). When the government was charging 18 percent GST on insurance, insurance companies were eligible for input tax credit, but with no tax on insurance policies they are not eligible for the same as the unique feature of ITC is that unless you charge tax from end customers, you cannot claim this form of tax in the range of 2.2-2.7 percent.
Companies like Niva Bupa, Care Health, and ICICI Lombard have reduced commissions to distributors by 18 percent in response to the GST policy changes under which the government exempted individual insurance policies from GST but withdrew input tax credit for insurers. This has led to restructured commission structures, treating them as GST-inclusive.
In FY24, life insurers alone paid (after charging from policyholders) about Rs 24,000 crore in GST but it was offset by Rs 14,000 crore of ITC that means they face a loss of Rs 15,000 crore in the absence of ITC now. Similarly, health insurers face potential annual losses of Rs 1,800 crore in ITC, while the overall industry impact is estimated at Rs 15,000 crore, according to industry experts.
The industry's response of passing costs to distributors raises questions about the effectiveness of the policy in achieving its goal of expanding insurance penetration. For instance a commission that was previously Rs 1,000 now equates to Rs 847, representing a substantial cut for insurance agents and other distribution channels.
Meanwhile the agents' body has questioned the move saying the move undermines insurance distribution. Prashant Mhatre, the president of the General Insurance Agents Federation Integrated, (GIAFI), has sounded an alarm, saying the decision risks weakening the role of agents, brokers, and advisors who are central to insurance reach.
According to Mhatre, the exemption has led to an immediate loss of ITC for distributors. Earlier, agencies and advisors could claim ITC on commissions, rewards, and other business expenses. With GST removed on premiums, the ability to offset taxes on these costs has vanished.
“This is not a small change. It directly cuts into the working capital of agencies, brokerages, and individual advisors. Many small and independent operators will struggle to stay viable,” Mhatre said in a statement.
Another concern flagged by the lobby is that distributors are now required to pay GST from their commissions. In some cases, insurers have already communicated to agents that this effectively reduces payouts by around 18%.“The burden is now falling on distributors to pay the tax. This severely affects our take-home pay and reduces our ability to sustain and grow our business,” he added and warned that the decision to slash commission could affect insurance penetration in smaller towns and rural areas.
“If our earnings are cut, motivation will fall, and access to insurance will shrink. This is against the ‘insurance for all by 2047,” drive. Mhatre also called for unity among all insurance distributors urging agents, federations, and associations across life, general, and health insurance to come together under one platform.
“This is a stark warning. If such a policy change can affect health insurance distribution today, tomorrow it can be extended to general and life insurance. We must unite, analyse the full impact, and raise our concerns with Irdai and the finance ministry. Our role is essential, not expendable,” Mhatre said.
The debate now puts pressure on both insurers and regulators to find a way to protect distributors while ensuring affordability for policyholders.