The Goods and Services Tax (GST) Council said on Friday that financial services will attract tax of 18 percent.
The insurance sector will now attract a taxation of 18 percent for the services offered by the industry after the Goods and Services Tax (GST) Council on Friday announced the rates for financial services. This would mean a direct impact on the premium being paid by the policyholders since this constitutes commissions as well as taxation.
Insurance company officials said that the rate hike will be immediately passed on to customers. Amitabh Chaudhry, Managing Director & Chief Executive Officer of HDFC Life, said that if the rate is 18 percent, then customers would have to bear the burden of the additional taxation being imposed on the insurance services.
Currently, a tax of about 15 percent is imposed on an average on insurance premiums and also includes cess and service tax.
In the past, insurance sector representatives along with the Life Insurance Council had approached the finance ministry asking them to consider the lowest tax slab of 5 percent for the sector. However, the ministry did not agree to this demand.
Even at the GST Council meetings, sources said that there were differences in opinion on whether insurance should be taxed at 12 percent or 18 percent. However, it was decided to have a uniform rate of 18 percent across the financial services sector.
Life Insurance Corporation of India (LIC), which has the largest number of policyholders in the country, is expected to face the maximum impact since the rise will have to be passed on to their customers.
It was also expected that payment through digital channels will attract a lower rate of tax under GST. However, no such announcements have been made.
Divyesh Lapsiwala, Indirect Tax Partner at EY, said that life insurance could have been considered as one of the sectors with a benign GST rate given the demographic situation in India and below average penetration of life insurance services.
There has been a differential rate of taxation in insurance based on the type of product, premium paying term and whether it is a life insurance or general insurance product. It has still not been disclosed whether small ticket policies or government-sponsored/promoted insurance will be exempted from tax under GST.Watch: Decoding GST
Joydeep K Roy, Partner and Leader- Insurance, PwC India explained that GST implementation has to be done sensitively keeping in mind the inherent nature of insurance business.
“While products like motor, health, term have all the premium categorised as risk premium, savings products like endowment and unit-linked insurance products have a large component of consumer savings other than risk premium. Considering the low penetration of insurance in India, Micro Insurance (by regulator definition) or certain instances below a threshold need to be exempt from GST,” said Roy.
GST will be implemented from July 1. Hence, all products bought or renewed after that date will bear a higher premium rate.“Health insurance is no more a business proposition - it is a social necessity. An attractive GST would have further influenced insurance penetration but the industry is still geared up to take the growth further with rise in life expectancy, per capita income, financial literacy and medical advancement in India,” S Prakash, Senior Executive Director, Star Health Insurance.