In what could be a significant shake-up, the Goods and Services Tax (GST) regime may soon undergo some major surgery—at least if one goes by the hints dropped by Prime Minister Narendra Modi in his Independence Day speech.
Among the headline-grabbing proposals is the idea of making insurance premiums completely GST-free.
Addressing the GoM (Group of Ministers) tasked to review rate rationalisation, the future of the compensation-cess and insurance, finance minister Nirmala Sitharaman said the GST reforms will seek to provide greater relief to consumers, farmers, the middle class and Ministry of Micro, Small and Medium Enterprises (MSMEs).
Should the GST Council give this a green light, policyholders would pay only the base premium quoted by insurers, no tax attached. If it sounds like a free lunch, that is not quite the case.
Currently, life and health insurance premiums come with an 18% GST tag. So, for an annual premium of Rs 20,000, the government promptly adds Rs 3,600 in tax, bringing the total to Rs 23,600.
Abhishek Kumar, Sebi RIA and founder of Sahaj Money, pointed out to a section of the media that slashing the GST rate from 18% to something lower would indeed reduce the cost for customers by directly cutting the GST component on their premiums.
He added that if the GST rate were made zero, the savings would be much less because insurance companies would lose their Input Tax Credit (ITC) benefits and would pass on the higher costs to customers through increased base premiums.
Under the existing system, insurers enjoy the luxury of claiming ITC on the GST they pay for their operational expenses. This offsets their tax liability and keeps premium pricing relatively sane.
Kumar explained that ITC allowed insurers to lower their tax burden by offsetting the GST paid on expenses with what they collected from policyholders. Without that offset, he said, the cost pressure would shift straight back to the customer.
For those dreaming of zero GST as a financial panacea, he offered a dose of realism. He noted that a GST cut to, say, 5% while retaining ITC could yield far better results. For example, on a Rs 25,000 annual premium, GST would fall from Rs 4,500 to Rs 1,250—a neat saving of Rs 3,250. But with zero GST and no ITC, insurers might simply raise base premiums, leaving customers with far less to cheer about.
Here’s a reality check: while zero GST sounds like a victory parade for consumers, the actual benefit might be more of a mirage. A lower GST rate with ITC still in play could end up being the more rewarding route.
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