The GST Council’s move to reduce the tax rate on individual life and health insurance policies to zero percent has invoked mixed responses from the insurance sector. While they welcome the move as it is seen as a positive step to improve insurance penetration, it also seems to have left insurers reassessing the financial and operational implications of this move. The key concern is how companies can avail the benefit of input tax credit (ITC) under the revised GST framework.
Early interpretations of the move suggested a zero percent tax rate, though an official GST Council release confirmed that these policies have been made “exempt” from GST. While arithmetically both versions mean that GST would be zero for individuals to whom policies are being issued, the devil is in the details.
If the tax rate for such policies were reduced from 18 percent to zero percent, companies would be able to avail ITC benefit. In simple terms, they would be able to adjust the input tax credit against the gross GST payable and the difference between the two would be the GST outflow for companies.
However, the GST council has exempted or scrapped tax on individual life and health policies. According to the present law, entities exempt from GST will have to forego the accumulated ITC and, in such cases, the gross GST payable cannot be set off against the ITC.
“Now that the notification classifies GST for this category as exempt, whether the GST Council will be able to reclassify insurance for individuals in the life and health sectors from ‘exempt’ category to ‘0%’ GST slab is not clear,” said a CEO of private insurance company. “Therefore, what we are seeking is that at an entity level, we should not be classified as ‘exempt from GST’“, he added.
According to people close to the matter, insurers may also be seeking clarity from the Central Board of Indirect Taxes and Customs (CBIC), the apex body administering GST laws, on several critical points, including the applicability of Rule 42 which provides guidance about the manner of determination of input tax credit in respect of inputs or input services and reversal thereof.
Agreeing with the person cited above, a CEO of a state-run insurance outfit said the industry has approached the government in this regard. “We have also represented the matter to IRDAI”.
IRDAI or Insurance Regulatory and Development Authority is the regulatory body for insurance companies and a similar representation was made back in February this year as reported by Moneycontrol.
If insurance companies at an entity level are not classified as exempt from GST, they would still be able to avail ITC. “For most players, individuals account for only 30 - 50 percent of their policy base. A substantial portion of the business will continue to come from 18 percent GST slab, at least as of date. At an entity level, we are still liable to GST,” said another senior executive with a private insurance company.
Group insurance policies, largely taken by corporates on behalf of their employees account for a majority of policies in most cases and continue to attract GST at 18%.
As an allied issue, sources say the industry has also sought guidance on how to treat advance-paid premiums and renewals, specifically and whether the exemption will cover premiums payable after September 22, even for policies sold earlier.
It is anticipated that a formal notifications and FAQs might be issued to address these concerns.
If insurance companies are allowed to avail the benefit of ITC, it might remain business as usual for them as the September 3 amendments to GST may not have an adverse impact on the business.
However, if ITC cannot be claimed, sources say that it could have a financial implication of Rs 200 - 250 crore for the industry. “The smaller players will be impacted more and to mitigate this, some players may end up increasing insurance premiums,” said one of persons cited above.
Meanwhile, news reports suggest that even as clarity on the matter is awaited, state-run insurance companies such as Life Insurance Corporation of India and New India Assurance have been asked to pass on the full benefit of GST exemption of individual life and health plans to customers.
A former CEO of a general insurance company pointed out that even if there is no change in stance, ultimately the market forces will come into play and in about a year or so, in order to remain competitive against the state-run outfits especially in the life insurance sector, players will have to absorb the cost of input GST.
“Insurance industry has had a prolonged lull period for three years and another rebalancing of such nature could result in another weak fiscal,” said an equity analyst. This explains why most insurance stocks pared the initial gains in the bourses to close in the red on Thursday’s trading session, reacting to concerns on treatment of ITC.
To be sure, insurance companies avail several services and incur GST for commission payments to agents, IT services availed, advertising, and other administrative expenses. “Reversal of ITC could impact working capital and require recalibration of accounting systems,” said an industry executive, though some of the large players feel the net tax burden may not spike significantly.
Billing systems, accounting processes, and IT platforms may need urgent reconfiguration to separately track exempt and taxable supplies. “Consequently, the operational burden may increase significantly, even if the financial hit is not as large as feared earlier,” said the source cited above.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
