With a hike in post-GST rates to 18% from the current 15%, both the insurance sector and banking sector are poised to get more expensive after July 1. Impact of gst on insurance and banking will increase the premiums especially for families that pay for health, life and a car insurance.
GST & Insurance
Life Insurance & Health Insurance
There are 3 types of life insurance :
- Term insurance plans- basic life insurance policies
- ULIPs– insurance and investment under a single integrated plan
- Endowments (including money-back)- life insurance policies that pay a lump sum on maturity/death or a fixed sum every month (sort of like a pension)
Service tax applicable on each type is different –
For example, ICICI Prudential Life Insurance applies service tax at the following rates:
| Category | Service Tax With SBC And KKC | After GST |
| Term insurance premium | 15% | 18% |
| ULIP charges | 15% | 18% |
| Health insurance premium | 15% | 18% |
All these rates will be replaced by 18% which will result in increase in premiums.
The value of supply of services in relation to life insurance business shall be:
a) The gross premium minus the amount allocated for investment, or savings on behalf of the policyholder, if such amount is informed to the policyholder.
For example,
| Particulars | Under Service Tax | Under GST |
| Gross Premium | 1000 | 1000 |
| Investment Portion | 600 | 600 |
| Life Insurance portion | 400 | 400 |
| Service tax @ 15% on 400 | 60 | —– |
| GST @18% on 400 | —– | 72 |
b) Single premium annuity policies- 10% of the premium
c) All other cases- 25% for 1st year and 12.5% for 2nd year onwards on the premium charged.
| Gross Premium p.a. | 1000 |
| 1st Year | |
| 25% of value | 250 |
| GST @18% on 250 | 62.50 |
| 2nd year | |
| 12.5% of value | 125 |
| GST @18% on 125 | 22.50 |
d) If the entire premium is for life insurance, GST @18% will apply on the entire premium
Impact
Both existing and new policyholders will face an increase in the premium amounts due to increase in rates.
For insurers, the increase in taxes will be passed on to the consumers. The insurers expect higher compliance and administrative costs due to the increased number of GST returns and also effect of taxability of inter-branch services.
General Insurance
General insurance includes fire insurance, marine insurance, car insurance, theft insurance etc. The GST rate will also be 18% on general insurance.
Impact
For policyholders, the general insurance premium will rise as tax has increased from 15 to 18%.
Corporate policyholders, who have taken general insurance, can enjoy input tax credit on the GST paid on their policies (it was available to them even under service tax).
Life and health insurees will not have input tax credit as it is not available for life and health insurances (as they are for personal purposes). Even corporate policyholders with group life and health insurance for their employees will not enjoy any input tax credit.
Life insurance provided by Government schemes are exempted from GST:
- Janashree Bima Yojana (JBY)
- Aam Aadmi Bima Yojana (AABY)
- Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum cover of Rs. 50,000
- Varishtha Pension BimaYojana
- Pradhan Mantri Jeevan Jyoti BimaYojana
- Pradhan Mantri Jan Dhan Yogana
- Pradhan Mantri Vaya Vandan Yojana
- Any other insurance scheme of the State Government as may be notified by Government of India on the recommendation of GSTC.
- Life insurance provided by Central Government to members of the Army, Navy and Air Force.
Banking
Banking services charge 15% service tax currently which will increase to 18% under GST. Like insurance, banking services will also become more expensive to the customers due to increase in taxes.
Most banks have now applied transaction charges on cash withdrawals from different bank ATMs, cash withdrawals from branch (first 5 for both are free). All these attract 15% service tax which will increase to 18% under GST regime.
Banking Companies
Banking companies will pass on the tax liability to their customers. However, their administrative and compliance work will increase tremendously. Branches give services to eachothers which will be taxable under GST (they can later claim input tax credit). This will increase the paperwork and therefore the operating costs.
Good news for business consumers. They can now claim input tax credit on the banking services paid on their business accounts.
Conclusion
All policyholders will have to pay higher premiums on their insurance due to increase in GST rates. An average family with life, health and car insurance will find an increase of 3% on their insurance expenses. Assuming they spend a total of Rs. 30,000 per year on insurance excluding service tax their expenses will increase by 3% i.e., Rs. 900.
An edited version of this article has also been published in Financial Express.
