Indian Premiums set to Follow the GST path

The impending implementation of GST would undoubtedly impact one’s personal finances especially when it comes to financial services, albeit marginally. From the present rate of 15 percent, the GST on banking, insurance and investments such as real estate, mutual funds will see a hike of three percent as the GST will now be 18 percent on them.

Primarily, there are three major kinds of life in insurance products – Term insurance plans, Ulips and Endowments (including money back) in India, according to a report in the Economic Times. The applicability of service tax (in the current format) on their premium is not similar in all three of them.

The premium paid in life insurance policies represents two portions – risk coverage and savings. The service tax is only on the risk portion of the premium and not on savings portion.

As per the GST rules, the value of services (on which GST is to be imposed) in relation to life insurance business shall be: (a) The gross premium reduced by the amount allocated for investment, or savings on behalf of the policy holder; (b) In case of single premium annuity policies, ten per cent of single premium charged from the policy holder and; (c) In all other cases, 25 percent of the premium in the first year and 12.5 percent of the premium in subsequent years.

Therefore, the immediate impact of GST would be the higher premium plus GST in term and endowment plans, due to the increase in rate of tax on insurance following implementation of the GST.

The policyholders may stand to benefit only if the insurance companies are allowed the benefit of input tax credit. Similar will be the impact on general insurance such as car, health and other non-life policies i.e. service tax (when replaced by GST) will increase by three percent of the premium amount. This would increase total outgo (premium plus tax).