Life insurance companies have opposed a proposal to exempt term insurance premiums from goods and services tax (GST), saying the move would block input tax credit (ITC) and result in higher costs for policyholders, sources have told Moneycontrol.
The insurers have sent a detailed representation to the government and the GST group of ministers (GoM) on insurance and said the tax structure that allows ITC claims should be retained.
“Life insurance companies have expressed concerns that in the case of term insurance, a zero GST rate would lead to ITC blockage, which would ultimately translate into an increased cost burden on premiums. They are not in favour of a complete exemption,” a source privy to the discussions said.
Input tax credit gets blocked under GST exemption because insurers cannot offset taxes paid on business expenses, increasing their costs.
At present, life and medical insurance premiums attract an 18 percent GST. The GST Council in its meeting on December 21 deferred a decision to exempt or reduce the levy on term life insurance premiums awaiting further inputs from the Insurance Regulatory and Development Authority of India (IRDAI).
Talking to media after the meeting, finance minister Nirmala Sitharaman said, “The GoM on health and life insurance has discussed the matter in detail. However, IRDAI’s inputs are still awaited. Once received, the GoM will finalise its report.”
Input tax credit worries
The insurers' primary concern is that a complete GST exemption would leave them ineligible for input tax credit, leading to higher operational costs that would be passed on to consumers in the form of higher premiums.
“Maintaining a GST rate with ITC eligibility is more viable and would avoid added financial strain on policyholders,” the source added.
When GST on term insurance premiums is exempted, insurers cannot claim input tax credit on the taxes paid for goods and services they use in business operations, such as IT infrastructure, marketing, and administrative expenses.
Under the current structure, insurers can offset these input taxes against the GST they collect from policyholders, reducing their tax liability. However, with a complete exemption, there is no GST output tax to offset the input tax, leading to a "blockage" of ITC. This increases insurers' operational costs which would be passed on to consumers, negating the intended benefit of exemption.
The estimated revenue loss from complete exemption would be is about Rs 200 crore annually, government officials said.
The exemption can stimulate demand in the sector by making policies more affordable for consumers. “It is expected that if GST relief is passed on to consumers through cheaper insurance premiums, the number of policies sold will increase, compensating for the revenue loss due to elasticity of demand in this sector,” the source said.
The GST GoM on life and health insurance was set up on September 15, 2024, under the chairmanship of Bihar deputy chief minister Samrat Choudhary.
The 13-member GoM includes Uttar Pradesh finance minister Suresh Kumar Khanna, his Bengal counterpart Chandrima Bhattacharya and Kerala counterpart K N Balagopal . Rajasthan’s health minister Gajendra Singh, Karnataka’s revenue minister Krishna Byre Gowda and Goa chief minister Pramod P Sawant are among the other members.
The final decision of the GST Council, which is led by union finance minister and has a minister each from a state as its members, on relief for term life insurance premiums is expected once IRDAI sends in its recommendations.
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