Like budgets and tax proposals, the devil is in details even in the GST Council decision to completely exempt—against strong push back from the industry--individual life and health policies from the 18% GST from the mid-night of September 21. Because the facts on the ground are not as simple as the government headlines want us to believe. This is so because, this exemption is an additional cost on insurers given that with no GST on life and health policies, they are not eligible for input tax credit (ITC) too, which typically is around 3.4% of the price of a policy.
In simple terms, under GST provisions, a product or service provider can claim ITC only if there is a tax component in the final product. The problem with no GST is that while an insurer will continue to pay GST on all the inputs sourced for making and selling a life/health policy, the firm is not collecting GST on the final product and thus not eligible to claim ITC for GST paid in purchasing goods/services to carry out her business.
Given this, many brokerages are of the view that unless the government restores ITC, insurers have no other option but to hike the base premium by 3-5% to offset the revenue loss, which effectively means that a customer will get 14-15% savings on a new life or health policy. An insurer gets around Rs 900 on a Rs 20,000 policy in ITC for the expenses like agency commission, advertising and marketing and other operational expenses. But the company will not able to claim this and have to book loses once the zero GST regime kicks in.
There is a potential chance that insurers may increase the base premium to recover losses from their inability to claim ITC next year as government has reportedly asked India Inc to pass on all the GST rejig benefits at least this fiscal, according to industry sources so that the political messaging is rightly captured. According to industry players, they on average get 2.5-3% in ITC per policy so a more realistic premium cost reduction is 14-15% from policies bought from September 22.
And a report from Kotak Institutional Equities Research sees the increase in base premium to up to 5% to offset losses arising from the absence of input tax credit.
“A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5%,” the report said, adding this will help them compensate for the loss of ICT that is currently availed of, and this means that a customer can expect only 12-15% reduction in premium, which still can potentially boost health insurance demand.
“While reinsurance service will also get exempted from GST, insurers will continue to pay GST on others. Given this, we assume the benefit of the inverted tax structure (ITS) cannot be claimed by insurers since these individual policies are exempt and the ITS benefit is not notified by the government,” the Kotak report said without offering a comment on the life industry.
International brokerage CLSA also expects insurers to hike base premium by 1-4% to offset the ICT losses. “Although it is anticipated that reduction of the tax element will translate into lower premia, the actual benefit can only be assessed after clarity on the ICT, which we will come to know over the coming days,” it said.
“Not being able to claim ITC will result in about 3% loss of revenue for new sales, but the major impact on insurers will be on existing policies, as their premia cannot be increased under the plea that ITC is not available. Some insurers may absorb this loss while some may partially pass on the revenue loss to policyholders by increasing premia on new plans,” former IRDAI member Nilesh Sathe said in his LinkedIn post.