The GST (Goods and Services Tax) Council is set to issue a clarification that reinsurance is not supply of service at its June 22 meeting. The meeting is also likely to issue a clarification on GST applicable on co-insurance, a government official said.
In its attempt to not disrupt insurance industry practices, the council is likely to discuss issuing a clarification that reinsurance is not a supply of service, a government official told Moneycontrol.
By definition, 18 percent tax is levied on any supply of service.
“The GST’s fitment committee has already discussed the issue and it is proposed that reinsurance should not be treated as supply and hence no GST should be applied on it. The fitment committee proposal will be placed before the GST Council in the June 22 meeting,” the official told Moneycontrol.
What is reinsurance?
Reinsurance is a practice in which an insurance company transfers a portion of its risk to another insurance company, called a reinsurer, in exchange for a premium. In essence, it's insurance for insurers.
“Supply may have been made but the GST is already paid on it, so it is proposed to not consider it as supply. This is the conclusion of the fitment committee,” the official added.
Primary insurers sell insurance policies to clients and assumes the risk associated with those policies. However, to mitigate its risk exposure, the primary insurer transfers a portion of this risk to a reinsurer through a reinsurance contract. In return for assuming a portion of the risk, the reinsurer collects a premium from the primary insurer. This premium is typically a percentage of the premiums collected by the primary insurer for the policies being reinsured.
By spreading the risk among multiple insurers, reinsurance helps reduce the financial impact of large and unexpected losses. This allows the primary insurer to underwrite more policies and provide coverage for higher-value risks, without risking insolvency due to a single catastrophic event.
Reinsurance plays a crucial role in the insurance industry by enabling insurers to manage their risk exposure effectively and to ensure their financial stability in the face of unforeseen events.
Co-insurance
The council is also likely to issue a clarification on the applicability of GST on co-insurance. Certain industry practices have been leading to non-payment of the tax, due to which clarity needs to be brought in, he said.
Co-insurance refers to the practice of 4-5 insurance companies providing insurance and are ready to bear the liabilities in the some proportion. The industry practice currently is for only one of the companies to pay GST.
Many leading insurance companies had last year reportedly received notices for non-payment of GST on co-insurance and reinsurance premiums.
In 2023, Star Health and Allied Insurance received a GST demand notice of Rs 38.99 crore for non-payment of GST liability on the premium received by the company under a co-insurance arrangement for the period July 2017 to March 2023, the company filing had said.
ICICI Lombard General Insurance received a GST notice in 2023 for not paying tax of around Rs 1,730 crore from July 2017 to March 2022. The alleged demand show-cause-cum-demand notice pertains to non-payment of GST on the co-insurance premium accepted and non-payment of GST on reinsurance premium ceded to various Indian and foreign reinsurance companies from July 2017 to March 2022, the company filing had said.
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