GST and its impact on the insurance sector
25 May 2019
Life is full of uncertainties and one cannot predict when something unfortunate happens. The unpleasant circumstance also brings with it several legal and financial issues that one has to face in the absence of a valid insurance policy. Most people prefer to own several different types of insurance policies be it health, home, vehicle, personal accident insurance and even life insurance. This means they would be paying multiple premiums for each policy separately. With the introduction of the Goods and Service Tax in India in 2017, the amount paid as insurance premium has also been affected. This article explains the meaning of GST and highlights the impact of GST on insurance premiums.
What is GST?
Goods and Service Tax, often referred to by its abbreviation, GST, came into effect in July 2017. This new taxation system was introduced with the view of bringing about a reform in the tax structure between the Central Government of India and state governments. GST is essentially a Value Added Tax (VAT) that was introduced to eradicate double taxation from goods and service prices, down the value chain. It has also affected the tax system and the insurance sector in the country, especially insurance premiums.
GST impact on insurance sector – The life insurance category
The introduction of GST has impacted all insurance sectors. Let’s look at how GST has impacted the life insurance sector.Before the introduction of GST, policy holders were paying a service tax of 15% on their life insurance premiums. However, since the introduction of GST, policy holders need to pay an 18% tax rate, a 3% increase on their life insurance premiums.One must remember that there are four sub-categories of life insurance policies, which include term plans, pension plans, and unit linked insurance plans, (ULIPS) and endowment plans. The service tax levied on each of these different categories is different, so the GST impact on insurance plans depends upon the life insurance category chosen by the policy holder. Since a term plan comes with the death benefit, it is termed as a risk-free plan. A few term plans also come with return of premium benefit. As such, term plan insurance premiums are typically low, so even with the GST applicable, their premium amounts have increased only slightly. On the other hand, ULIP and endowment plans offer coverage in the event of death or maturity, whichever instance first occurs. The risk element is computed in the premium element, making these plans more expensive when compared to term plans. As per new norms, the policy holder has to pay an additional 4.5% GST on new ULIPS and endowment plans and 2.25% on renewing these policies.
Impact of GST on Insurance – The general insurance category
General insurance encompasses a wide range of insurance policies in which the insurance provider offers several different benefits and different amount compensation for damages or losses caused to assets and experiences. Typically, a general insurance policy includes vehicle insurance, health as well as travel insurance. Let’s look at GST impact on insurance sector with reference to each type of insurance policies covered under general insurance.
Earlier the government levied a 15% service tax towards the payment of premiums of various types of health insurance policies; whether they are individual health plans, family floater plans, senior citizen medical plans, critical illness plans, and health plans for pre-existing medical conditions. Since the introduction of GST in July 2017, there has been a 3% increase in tax and policy holder have to pay a GST of 18% on all types of health policies.
The tax percentage for travel insurance policies has also been revised to 18% from the previous 15%.
Like with travel and health insurance premiums, the tax percentage for automobile insurance has also been increased by 3% and policy holder has to pay 18% GST on automobile insurance premiums.
Insurance is a great way of securing the financial future of yourself and your family, should anything unfortunate happen. But with the rising inflation levels and the ever increasing cost of premiums, most policy holders have found the need to revisit their insurance plans and the premiums payable since the introduction of GST and GST’s impact on insurance. It is therefore recommended that you calculate your insurance premium before you purchase or renew insurance.