🔸 Understanding Impact of GST Exemption on Individual Insurance 🔸

 

56th  GST council meeting decsion to give  exemption to  individual life and health insurance policies from the Goods and Services Tax (GST)has significant implications for both insurers and consumers.
🔶 Key Changes to Insurance Taxation
The new rates create a clear division for insurance products:
▪️ GST-Exempt (No Input Tax Credit - ITC)
Individual Life Insurance,Individual Health Insurance Policies: All premiums paid on or after 22 September 202,including riders.
▪️ Government Insurance Schemes: Remain GST-exempt.
🔶 Still Subject to GST (with ITC)
▪️ Annuity and Pension Policies(*Clarity required)
▪️ Group and Corporate Insurance policies
▪️ General Insurance Policies (excluding health)
🔶 Implications for Insurers
The GST exemption presents a complex challenge for insurance companies. The immediate impact is the non-availability of ITC on a significant portion of their costs. This will likely increase their operational costs. Initial estimates suggest this could raise costs by 3% to 5% for health insurance and 0.5% to 1.5% for life insurance. The precise impact will vary depending on a company's product,cost structure and distribution mix.However, this cost burden will be partially offset by a reduction in GST on some of their inputs. Another challenge is managing legacy policies, as premiums for older policies were calculated with the assumption of ITC, which is no longer available on renewal . Insurers also face a potential cascading effect on commission costs if they raise premiums to compensate for the lost ITC, as commissions are a percentage of the premium.

🔶 What This Means for Policyholders
For consumers, the main question is whether this change will result in lower premiums. The outcome depends on two critical factors:
▪️ Management's Decision to Absorb Costs: Insurers decisione to absorb the costs or not to,from the lost ITC, partially mitigated by reduced GST inputs. Some public sector general insurers have already announced they will pass the full benefit of the GST reduction on to customers.
▪️ The Anti-Profiteering Rule: The GST rules include a provision that requires businesses to pass on the benefits of any tax rate reduction to customers. This rule is designed to ensure consumers benefit directly from such policy changes, and it's expected to apply here as well.
🔶 A Pro-Customer Path Forward
This policy shift is a pivotal moment for the insurance industry. By embracing a pro-customer approach, insurers can absorb the lost ITC through improved cost efficiencies and by leveraging technology like AI to streamline operations. By doing so, they can pass the full benefit of the GST exemption to consumers, making insurance more affordable and accessible for everyone. This will not only align with the government's goal but also help them gain a competitive edge and build customer trust.
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