The insurance sector is likely to see a breather from tax burden with the GST Council set to review an exemption for reinsurance after the elections, Moneycontrol has learnt.
In its attempt to not disrupt the insurance industry practices, the Goods and Services Tax (GST) Council may issue a clarification that reinsurance is not a supply of service, a senior government official said.
Many leading insurance companies had last year reportedly got notices for non-payment of GST on reinsurance premiums. 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 applicable on it. The fitment committee proposal is kept ready to be placed before the GST Council in the next meeting after the elections. The issue whether reinsurance is a supply will be placed in the next GST meeting. The new government is likely to be formed in early June. The GST Council meeting may happen in June-end,” the official told Moneycontrol.
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 arrived at by the fitment committee,” the official added.
How reinsurance works
The primary insurer sells 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 ensure their financial stability in the face of unforeseen events.
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