The group of Ministers on GST has recommended a full exemption of Goods and Service Tax on individual life and health insurance policies. The move, announced by GoM Convenor and Bihar Deputy Chief Minister Samrat Choudhary, is aimed at improving affordability and expanding coverage.
However, Emkay noted that the scope of the exemption remains unclear. “Scope of exemption remains unclear From the statements, it is still unclear if the entire Individual Life Insurance basket (including savings and annuity) or just the Retail Term Life that will be exempted from GST,” the brokerage noted.
The brokerage noted that there is also ambiguity around whether group platform products like credit life and banca health insurance, paid by individual customers, will benefit from the exemption.
Emkay further added that, one of the biggest implications of the exemption is the loss of Input Tax Credit. “With the GST exemption, ITC benefit is likely to go away for the products falling under the ‘Exempt’ category, the GST Input Tax Credit (ITC) will not be available,” it noted
This could lead insurers to adjust base premiums to offset the loss. For example, if an insurer currently collects Rs 100 premium and Rs 18 GST from the customer and is incurring Rs 35 as expense on commissions and other services and has hence paid Rs 6.3 (18% on Rs35) as GST, then the insurer will deduct this Rs6.3 from the collected GST and deposit the balance Rs11.7 with the government.
With the premium now falling under the ‘exempt’, category, the insurer will increase the base price to Rs 106.3 to cover for the ITC loss.
Despite this, the end-consumer is expected to benefit. “Price for end-consumer will certainly go down – by how much is still unclear” Emkay said.
The brokerage noted that, “entire noise around the GST cut on insurance” has been aimed at bringing down prices to improve affordability, especially in the post-Covid era when the central and state governments along with the political class realised the importance of insurance protection and the extent of under-insurance in the society
The government is expected to closely monitor that insurers pass on the benefits to customers rather than absorbing them into margins.
The removal of ITC will also shift focus to cost control, particularly around commissions and non-salary operational expenses.
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