Impact of GST on Insurance and Banking

In the 54th GST Council meeting, the GST Council recommended constituting a Group of Ministers (GoM) to holistically look into the issues of GST on life insurance and health insurance and submit the report by the end of October 2024. 

GoM, in its meeting, recommended the following:

1. Exempting GST on insurance premiums paid for term life insurance policies and senior citizens' health insurance. 
2. GST on premiums paid by individuals other than senior citizens for health insurance with coverage of up to Rs.5 lakhs is proposed to be exempted. 
3. Bringing down GST from 18% to 5% on health insurance premiums for non-senior citizens.

A relief on the rate of GST on health insurance is widely expected in the upcoming 55th GST Council Meeting.

GST on 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 was applicable on each type is different – For example, ICICI Prudential Life Insurance applies service tax at the following rates:

All these rates was replaced by 18% which resulted in increase in premiums. The value of supply of services in relation to life insurance business is:

The value of supply of services in relation to life insurance business is:

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,

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.

d) If the entire premium is for life insurance, GST @18% will apply on the entire premium

Impact 

Both pre-GST and new policyholders faced an increase in the premium amounts due to increase in rates. For insurers, the increase in taxes were passed on to the consumers. The insurers faced a higher compliance and administrative costs due to the increased number of GST returns and that also affected of taxability of inter-branch services.

General Insurance

General insurance includes fire insurance, marine insurance, car insurance, theft insurance etc. The GST rate is 18% on general insurance.

Impact 

For policyholders, the general insurance premium rose as tax rate increased from 15 to 18%. Corporate policyholders, who have taken general insurance enjoy input tax credit on the GST paid on their policies (it was available to them even under service tax). Persons who are life and health insured will not have input tax credit as it is not available for life and health insurances (as these are taken for personal purposes). Even corporate policyholders with group life and health insurance for their employees do 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.

GST on No Claim Bonus

After a decision was reached in the 48th GST Council meeting, the CBIC clarified the applicability of GST on 'No Claim Bonuses' via Circular No. 186/18/2022-GST. 

Insurance companies typically offer their customers a 'No Claim Bonus' in cases where there have been no insurance claims made during the period of insurance. The amount is offered at the time of renewal of the insurance policy as a form of reward or discount and is deducted from the premium to be paid.

As per the Circular, the customer or insured person procures an insurance policy to indemnify themselves from any loss or injury as per the terms of the policy and are not under any contractual obligation to not claim insurance during the insurance period. There is no supply provided by the insured person to the insurance company by not lodging insurance claims during the insurance period. 

As per clause Section 15(3)(a) of the CGST Act, the value of supply shall not include any discount given before or at the time of supply if the same has been recorded on the invoice. Hence, the 'No Claim Bonus' cannot be considered as a consideration for any supply provided and is treated as a discount and deducted, and there will be no GST applicable on the same.

GST on Banking Services

Banking services was charged a 15% service tax which later on got increased to 18% under GST. Like insurance, banking services became more expensive to the customers due to increase in taxes. Most banks apply transaction charges on cash withdrawals from different bank ATMs, cash withdrawals from branch (first 5 for both are free). All these attract an 18% GST.

Banking Companies

Banking companies pass on the tax liability to their customers. However, their administrative and compliance work increases tremendously. Branches give services to each other that is taxable under GST (they can later claim input tax credit). It increase the paperwork and accordingly increase the operating costs. Business consumers can heave a sigh of relief as they can claim the input tax credit on the banking services paid on their business accounts.

Conclusion

All policyholders pay a higher premiums on their insurance due to increase in GST rates. An average family with life, health and car insurance found 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 increases by 3% i.e., Rs. 900.