Goods and Services Tax (GST), which came in to effect on 1st of July 2017, aimed at eliminating the cascading effect of various taxes on the cost of goods and services. This single value-added tax replaced the entire tax structure in India. GST is levied at every point of sale, from the manufacturer right up to the end customer. How GST works and how does How GST affects Your Insurance Premiums?
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How does GST work?
Prior to the implementation of GST, various indirect taxes were levied by both the State Government and Central Government. There were as many as 17 central and state taxes in the pre-GST regime, which included cess, Value Added Tax, Central Excise Duty, Central Sales Tax, entertainment tax, state VAT, and entry tax, among others. On numerous occasions, there was overlapping of taxes levied by both the center and the state. The indirect tax levied on services in the pre-GST rule stood at 15 percent, while that on goods varied from 27 to 32 percent.
Under the GST system, all the indirect state and central indirect taxes were done away with. Now, there are merely three taxes applicable under GST, namely CGST (tax on an intra-state sale collected by the Central government), SGST (tax on an intra-state sale collected by the State government), and IGST (tax for inter-state sale collected by the Central government).
Impact of GST on the insurance industry
The implementation of GST had a huge impact on various industries in the economy, including the insurance sector. Earlier, the rate of service tax levied on insurance policies was 15 percent. This comprised of 14 percent basic service tax, 0.5 percent Swachh Bharat Cess, and 0.5 percent towards KrishiKalyan Cess.
Post GST implementation, the tax rates for the insurance industry was frozen at 18 percent. This indicates a 3 percent increase as compared to the previous tax. The 3 percent hike is applicable for all policyholders – those looking to invest in a new insurance policy as well as those seeking to renew their existing policies.
Therefore, the increased rate of GST will have an impact on the amount of premium you pay towards your policy. You may understand the impact of GST on the insurance sector with the help of an example. Assume that you are paying an annual premium amount of INR 50,000 to receive the benefits of a health insurance cover of INR 5 lakh. Under the previous tax structure, a service tax of INR 7,500 was applicable on your policy (15% of INR 50,000). However, under the GST rule, the tax amount is now increased to INR 9,000 (18% of INR 50,000). This implies that you have to shell out an additional amount of INR 1,500 towards taxes, indicating that premiums have become costlier.
The scope of GST impact
The GST of 18 per cent is applicable across various types of insurance policies – both life insurance policies as well as non-life insurance. In terms of life insurance, the 3 percent hike is applicable on term plans, and in the non-life insurance, space is applicable to health insurance and motor insurance.
However, this unified tax affects Unit Linked Insurance Plans (ULIPs) and endowment policies differently.
Impact of GST on ULIP policies
A ULIP plan offers the dual benefit of insurance coverage in an event of unfortunate death as well as the potential to reap good returns. Insurers, therefore, use part of the premium for investment and the rest towards mortality charges. GST, in a ULIP investment, is chargeable only on the premium paid towards risk coverage and not on the entire premium amount. For example, assume you are paying a total premium of INR 1,000, out of which you are charged a mortality charge of INR 100, while the remainder INR 900 is invested in debt, equity index, or bond funds. This means that GST of 18 percent will be levied only on INR 100, which amounts to INR 18.
You may use a ULIP calculator to determine your revised premium.
Impact of GST on endowment plans
Endowment policies are a form of life insurance. Your loved ones are entitled to receive the sum assured amount in an event of an unfortunate event of death during the policy term. Such a type of policy facilitates savings over a specific term so that you are able to receive a lump sum amount at the time of policy maturity. For such a type of insurance plan, GST is applicable on 25 percent of the premium amount paid in the first year. Thereafter, GST is payable on 12.5 percent of the premium amount until the policyholder’s death or maturity of the policy, whichever is earlier.
It is an undeniable fact that the implementation of GST has made insurance policies expensive. A greater impact can be seen on health insurance plans, motor insurance, and term policies, as there is a direct 3 percent hike payable towards GST, as compared to ULIP investment policies and endowment plans.
However, that being said, one simply cannot ignore the importance of investing in an insurance policy. Your insurance provider assumes liability for certain risks, allowing you to enjoy peace of mind. Such a policy offers the much-needed financial protection towards unexpected contingencies in life. It provides risk coverage enabling you to build a strong financial future.
Thanks to the implementation of GST and the subsequent rise in premium price, insurance providers are offering great features and policy benefits to tackle competition effectively. You may benefit from this and opt for a cover that fulfills your needs and requirements.
