MC EXCLUSIVE Private insurers face distributor pushback on ITC burden

Ongoing negotiations are examining whether a four-way cost-sharing model involving shareholders, distributors, policyholders, and vendors, could offer a balanced and sustainable solutions

The insurance industry maybe heading into a fresh conflict loop as private insurers and their distribution partners remain at odds over who should absorb the input tax credit (ITC) loss triggered by the GST cut on individual life and health products, multiple sources familiar with the matter told Moneycontrol.

While some distributors initially agreed to allow insurers to pass on the ITC burden after the GST on these products was reduced from 18 percent to zero, several others did not, and even those who had agreed are now reconsidering.

The matter has already reached the regulator’s table.

A senior executive at a life insurance company who chose to remain anonymous said, the issue was flagged at a recent CEO-level meeting convened by IRDAI. However, the regulator has so far not issued a formal directive or taken a public position, preferring to watch how the negotiations evolve at the industry level.

Ongoing negotiations are examining whether a four-way cost-sharing model involving shareholders, distributors, policyholders, and vendors, could offer a balanced and sustainable solution.

When asked whether this impasse means policyholders may never receive the full GST benefit, executives said it is too early to conclude, but acknowledged that some form of repricing or an alternative adjustment mechanism may ultimately be required.

But for now, the stalemate continues.

Queries sent to IRDAI on the ongoing negotiations over the ITC burden, the status of any regulatory intervention, and the timeline for ensuring full GST pass-through to policyholders remained unanswered at the time of publishing.

At the heart of the dispute is the structural consequence of the GST change. The shift from 18 percent GST to 0 percent on individual life and health insurance does reduce the tax burden for customers, but it also means insurers are no longer eligible to claim ITC on expenses such as distributor commissions, administrative services, and vendor charges linked to these exempt products. This creates a significant recurring cost that insurers must now absorb.

Why private players targeted distributor commissions

Private insurers have moved to neutralise this new cost by trimming distributor commissions. The rationale, they argue, lies in the Expense of Management (EoM) relaxation that was implemented on April 1, 2023.

The reform allowed insurers greater flexibility in managing non-linked distribution payouts. Most private insurers made aggressive use of this window, raising agent commissions, channel incentives, and acquisition payouts to boost business.

This earlier expansion in commissions has now created a buffer that private players believe they can partially roll back to offset the ITC loss, without destabilising sales, at least in theory. By adjusting commissions downward, they argue, the ITC burden is absorbed quickly and with minimal administrative disruption.

But that logic does not extend evenly across the sector.

....and why public players are not

Public sector insurers, particularly LIC, did not significantly increase payouts even after the EoM framework was liberalised. LIC’s management itself indicated in its Q2 FY26 earnings call that commission structures remained largely unchanged despite the regulatory flexibility.

Industry executives attribute this to three factors.

First, the business model of PSUs, especially LIC, remains heavily tied to career agents and large, entrenched distribution forces whose incentives are governed by legacy agreements, union frameworks, and long-standing commission norms. These structures do not allow sharp or frequent tweaks, even when regulations permit it. In contrast, private insurers operate in a more elastic commercial environment where commissions are used actively as a competitive lever.

Second, PSUs carry a significantly higher share of fixed costs within their EoM, including long-term employee salaries, pension liabilities, administrative overheads, and extensive branch networks. This leaves less manoeuvrability to reallocate spending toward front-loaded distribution payouts.

Third, PSUs rely less on incentive-driven new business and more on renewal-heavy, traditional savings policies, which inherently do not require the aggressive acquisition payouts that private insurers deploy to chase market share. As a result, they had neither the strategic need nor the structural room to meaningfully raise commissions after the EoM relaxation.

Because PSUs never expanded distribution payouts to the degree that private players did, they now lack comparable “headroom” to cut commissions in response to the ITC loss.

This divergence has created a pronounced divide between the two segments of the industry: private insurers see downward commission adjustment as the most practical immediate lever, while PSUs are far less willing, and in some cases unable, to use distributor cuts as the first line of defence.

Distributors push back

Distribution networks, spanning agents, brokers, corporate agents, and large agency houses, have pushed back strongly. Many argue it is unfair and impractical for a single stakeholder to absorb the entire hit from a GST-related structural shift.

Across conversations with industry participants, a consistent position emerges: the ITC burden should be shared among four parties including shareholders, policyholders, vendors, and distributors.

But private insurers’ attempt to place the cost primarily on distributors has led to a breakdown in alignment. Several large distributors have already refused revised commission structures, and even those who initially agreed are reconsidering after internal assessments of income impact and sales viability.

Adding another layer to the issue, consumer feedback continues to show that many policyholders have not received the full GST benefit, even months after the rate change came into effect, as reported by Moneycontrol earlier and confirmed by industry executives.

This is visible in survey findings conducted by consumer networks, where a considerable portion of customers reported their final premium outgo had not decreased to the extent expected. This failure to fully pass on the benefit contradicts the government’s explicit direction that the entire tax reduction should flow to customers.

Livelihood and sales concerns

Industry insiders also say distributors are facing livelihood pressures, especially smaller agents who depend heavily on commission income.

A senior official at an agents’ association told Moneycontrol that unilateral commission cuts are simply not feasible for most agents, many of whom operate on thin margins and rely on renewal commissions for income stability. Any reduction in payouts, they argue, would directly affect household earnings and discourage new business generation.

At the same time, agency networks and brokers warn that reducing commissions could lead to sales disruption, at a time when the insurance industry is still recovering from the post-Covid slowdown and intense pricing competition.

Reduced incentives, they argue, will impact customer acquisition efforts and push certain product categories, especially low-ticket, low-margin policies, into viability risk.

The senior official also confirmed that industry stakeholders are engaged in discussions to identify an equitable burden-sharing formula. These discussions include representatives of insurers, brokers, and large distributor groups, and are increasingly being viewed as the only path to break the deadlock.

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