GST on Term Insurance: A Potential Shift in Taxation
A ministerial panel under the Goods and Services Tax (GST) Council is considering a proposal to levy a 5% GST with input tax credit (ITC) on term insurance plans. The move follows extensive industry consultations, as insurers push for a balance between tax relief and financial viability.
What’s the Proposal?
The Group of Ministers (GoM), led by Bihar’s Deputy Chief Minister Samrat Chaudhary, has directed the fitment committee to assess the tax impact of a 5% GST rate with ITC on term insurance policies. The proposal arises from resistance within the insurance sector, which had earlier argued against a complete GST exemption, citing concerns over rising costs due to loss of ITC.
The Insurance Regulatory and Development Authority of India (IRDAI) has been tasked with evaluating the pros and cons of this taxation change and is expected to submit its report by the end of February 2025.
Industry’s Stance: 12% GST with ITC?
Insurance companies have long advocated for a 12% GST with ITC, arguing that while lower tax rates benefit policyholders, they could also erode input tax credit benefits. Without ITC, insurers may face higher operational costs, which could, in turn, affect policy pricing.
CBIC Chairman Sanjay Agarwal recently highlighted that IRDAI is reviewing industry concerns regarding the withdrawal of ITC benefits, indicating that the final recommendation may involve a middle ground.
Current GST Structure for Insurance Policies
| Insurance Type | Current GST Rate | Proposed GST Rate |
|---|---|---|
| Term Insurance | 18% (No ITC) | 5% (With ITC) |
| Health Insurance | 18% (No ITC) | No Change Expected |
| Life Insurance | 4.5% to 18% (varies) | Under Review |
Implications for Policyholders
- Lower Premium Costs: A 5% GST rate with ITC may reduce overall premium costs compared to the current 18% GST without ITC.
- Greater Affordability: With reduced GST, term insurance policies could become more attractive, boosting insurance penetration in India.
- ITC Utilization: Insurers could pass on some benefits of ITC to consumers, making policies more cost-effective.
What Happens Next?
- IRDAI’s Report Submission: Expected by February-end, outlining the feasibility of 5% GST with ITC.
- GoM’s Final Meeting: To review IRDAI’s findings before presenting recommendations to the GST Council.
- Possible GST Council Decision: A final call on this proposal may be taken in the upcoming GST Council meeting.
Conclusion
The proposal to reduce GST on term insurance from 18% to 5% with ITC could be a game-changer for both insurers and policyholders. If implemented, it may lead to lower premium costs and increased insurance adoption across India. However, the industry’s preference for a 12% GST with ITC suggests that negotiations are still ongoing.
Stay tuned for updates as the GST Council deliberates on this crucial reform that could reshape insurance taxation in India.