The Goods and Services Tax (GST) Council’s decision of exempting insurance services from indirect tax has been welcomed as an attempt to make insurance cheaper for customers. But experts from the insurance industry warn that the exemption can actually drive up insurance prices in the medium to long term.
The Existing Tax Regime on Insurance
Currently, insurance products like life, health, and general insurance have 18% GST charged on the premium. The policyholder bears this tax cost upfront, which is a transparent added expense. For instance, on a ₹10,000 premium, one pays ₹1,800 as GST.
What Exemption Means
If GST is removed, insurers who offer services will not charge tax on premiums anymore. Although this appears to directly cut down the costs for policyholders, the relief has a latent disadvantage: insurers will not be able to take input tax credit (ITC) on the different expenses they incur, including office rentals, IT systems, advertising, agent commissions (where relevant), and professional services.
Today, the GST legislation enables insurers to offset such input taxes against the tax paid on premiums. As soon as the industry shifts to exemption, all such input expenses are **incorporated in the ultimate pricing.
Why Premiums May Increase
1. Elimination of Input Tax Credit
Insurers invest heavily in operations, ranging from digital infrastructure to customer servicing. Without ITC, these taxes levied on vendors constitute an additional cost. Input tax losses alone are estimated by analysts to increase costs by 2-4% a year.
2. Increased Administrative Burden
Exemption makes it more complicated for tax arrangements among companies since they cannot balance their GST but still have to pay tax on business purchases. This results in increased compliance costs, ultimately being transferred to consumers.
3. Sector Underpricing Correction
The Indian insurance market is under-penetrated, and margins remain fairly thin. Insurers would have to increase base premium prices to cover profitability. The lack of ITC might be the catalyst for that price adjustments.
Impact on Policyholders
While GST abolition will make premiums lower on paper, policyholders might only experience marginal or temporary relief. In the long run, as insurers price up to cover embedded taxes, net premiums will turn out to be higher than they are presently.
For example, while the 18% GST reduction would cut a ₹10,000 premium to ₹10,000 (from ₹11,800 previously), insurers may hike base prices by 5–7% at renewal as the cost impact is borne.
Industry Outlook
Insurance firms, particularly in the health and general industries, were pushing for “zero-rating” rather than “exemption.” Zero-rating refers to services being taxed but at a 0% tax rate, and insurers will be able to maintain ITC benefits while providing tax-free premiums. This would avoid base price increases while promoting customer affordability.
Nutshell
Although the concept of GST exemption on insurance premiums seems customer-oriented, premium escalation due to loss of ITC cannot be overlooked. Policyholders might end up paying the price in the form of increased premiums unless policymakers shift towards zero-rating rather than exemption.
