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GST and its Impact on Insurance

The Lok Sabha, on 8 August, passed the long overdue Constitution (122nd Amendment) Bill to roll out the Goods and Services Tax (GST), with 443 lawmakers voting in favour of the legislation, and AIADMK MPs staging a walkout after registering their opposition. The passage of the bill marked a historic step towards tax reforms, said Prime Minister Narendra Modi, adding that the GST was “crucial” to end tax terrorism and also to reduce black money and corruption. According to Modi, the consumer will be the “king” now, and he thanked all parties that supported the bill. Earlier, on 3 August, the GST bill was passed in Rajya Sabha.

The GST will replace 17 federal and state taxes with a single national sales tax structure. It’s also expected to reduce business transaction costs. While the rate of GST is yet to be finalised, rumours peg it at around 18%, in line with what has been recommended by the concerned government panel.

But the common man is more interested on the impact the bill is likely to have on various sectors of the economy, and on their daily lives, regardless of what the government and policymakers think. While the “One Nation, One Tax” scheme has become a reality, and there’s every reason to cheer, services are likely to cost more once the GST is rolled out. As a result, if you are one of those already paying a hefty premium for health, life or even motor insurance policies, prepare yourself for some pain, once the new tax structure is implemented. Come April 2017, all the three insurances are likely to cost more, as taxes are slated to rise a maximum of 300 basis points. One basis point equals a hundredth of a percent.

How much will you have to pay?

The moot question. Period. Well, it actually depends on the type of insurance policies you have. Not all polices attract the 15% service tax now. Besides, the method to calculate service tax differs between policies. Service tax, under a unit-linked insurance plan (ULIP), is calculated on the premium component that covers the risk. But in case of an endowment plan, the 3.75% service tax is levied flat on the premium amount.

Impact of GST on insurance premium

It will be evident from the table given below that health insurance and term insurance policies would be the two most affected categories once the GST becomes operational. The service tax charged on the premium paid may climb to 18% from the present 15%.

                                Type of policyAfter GST implementationCurrent rate
Pure risk insurance/term insurance18%15%
ULIPs18%15%
Annuity: single premium1.8%1.5%
Motor insurance18%15%
Endowment policies (1st year)4.5%3.75%
Endowment policies (2nd year onwards)2.25%1.88%
Health insurance18%15%

One may argue that rise in service tax is largely proportionate across categories. So, why only these two categories will be affected? The basic reason is that both health and term insurances pay back only when something happens to the subscriber or the insured. More specifically, under term insurance plans, the insurer is liable to pay only when the insured passes away with the policy still operational. The insurer’s liability is zero if the insured person outlives the plan. The premium which the subscriber has paid, is also not paid back, unless the policy has some unique feature which permits it.

Likewise, under a health insurance plan, no direct benefits are offered to the subscriber unless he/she falls sick and is hospitalised. The insurer, of course, will add a no claims bonus (NCB) to the cover, but to claim it, the subscriber is required to have a medical condition. The inherent nature of both health and term insurance plans make them price sensitive i.e. people usually buy schemes that cost less. A greater incidence of service tax is likely to trigger price wars between insurers because buyers would now become even more price conscience. A similar eventuality holds good for motor insurance too.

According to media reports, the life insurance industry in India has been shrinking for some time now. The growth rate fell to 2.6% in 2016 from 4.6% in 2009. Fears abound the industry that the rates may further go southwards once the GST is implemented.

The Life Insurance Council, the apex industry body of insurance companies, has already written to the finance ministry, urging that GST be charged only on premium collected by the insurer, for their life insurance services, without factoring in the investment portion, where the companies act solely in the fiduciary capacity.

What should be your approach?

Ideally, premium should not be the sole consideration when you purchase insurance policies. Rather, you must inspect the insurance company’s claim settlement track record and its after-sales service. Please never forget that the fundamental motive to buy an insurance policy is to cover your risks. Avoid getting carried away by unbelievably low premiums. Many times, it’s prudent to ignore the costs to a reasonable extent, if you manage to get the cover you are looking for. The fact remains that subscribing to a term insurance is perhaps the most economical ways to cover your risks.

Similarly, all individuals should buy a health insurance, regardless of what surprise the final GST rate throws up. Since the number of levies that are now part of the premium you pay, would be subsumed into a single tax, it will considerably lower the cost of compliance. While the exact impact can be ascertained only when the final rate is fixed, preliminary estimates suggest a net 2% rise in the premium paid. So, if your premium payable is now ₹1,000, you may just have to pay ₹20-30 more.

With both Houses of Parliament stamping its approval on the GST bill, it would now have to be ratified in at least 16 of the 29 state assemblies. That seems to be a mere formality as none except AIADMK opposed its passage. And insurance policy subscribers shall have to wait for the final rate to be declared by the GST Council.

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