You have to shell out more for insurance premiums under GST regime

MUMBAI: For the middle class, an immediate impact of GST would be the higher premium outgo due to the increase in rate of tax on insurance following implementation of the Goods and Services Tax.

For families that own a car and pay for health and term insurance the increase in annual outgo would be close to Rs 1,000. "The immediate impact will be an increase in the tax from 15% to 18% which will have to be borne by customers," said Tapan Singhel, MD, Bajaj Allianz General Insurance.

He added that going forward companies will work out if there is any positive impact of tax credit. If there is a positive impact this will result in the premium coming down while the tax rate will remain.

However, for non-life companies the issue is getting advantage of input tax credit. Under the service tax regime insurance has been among the list of businesses for which input tax credit is not available. As it stands, the GST regime continues to exempt insurance from benefits of input tax credit.

"The government has continued with the existing exemptions under the GST regime. When there are exemptions the entire value chain of credit gets lost," Gopal Balachandran, chief financial officer, ICICI Lombard.

As a result the incidence of higher tax will fall on the customer.

Life insurers say that input tax credit advantage will vary according to the level of maturity of a company and the benefits can be calculated only after a period of time.

Also, while taxes can be passed on any revision in charges will require approval from the regulator. Given the increase in the cost of health cover, premium on mediclaim policies have soared with families spending Rs 20 to Rs 25,000 on health insurance alone. The outgo will now rise by 3%. There will be a similar increase in the premium on auto insurance.

Banking too will see a marginal increase in charges. However, since most of the earnings are through interest spreads the impact will be limited to loan processing fees, card fees, penalties and remittance charges.

Life insurance is slightly different. While term insurance is categorised as risk premium and taxed in line with motor and health insurance, life policies with a health component are taxed differently.

"Savings products like Endowment and ULIP have a large component of consumer savings other than risk premium. Service Tax (without cess) was 14.5% on pure risk products, 3.5% of first year and subsequent 1.75% on Endowment, 14% on ULIP insurer charges which are composite of risk and fund management fees," said Joydeep K Roy, Partner and Leader-Insurance, PwC India.

According to Roy, GST had to be implemented sensitively on these different categories of products. "Micro Insurance or certain instances below a threshold need to be exempt from GST," he said.