A group of ministers has recommended removing the current 18% Goods and Services Tax (GST) on life and health insurance premiums, a move that could have significant implications for both consumers and insurance companies in India.

Potential Benefits for Consumers

The proposed GST exemption appears to offer direct benefits to customers, potentially making insurance policies more affordable and accessible. This aligns with the government's objective of improving insurance penetration in the country.

Challenges for Insurers

However, insurance companies are raising concerns about the potential impact on their operations and profitability:

1. Loss of Input Tax Credit: Insurers warn that they will lose input tax credit on various expenses such as commissions, rent, power, and telecom bills. Currently, this credit helps offset part of their tax burden.

2. Impact on Protection Products: For protection products, commissions typically range between 35-40% initially before averaging 5-6% over time, with about 10% in other expenses. Presently, around 2% service tax on such costs is offset through input tax credits.

Dilemma for Insurance Companies

The competitive nature of the term-insurance market presents a challenging dilemma for insurers:

• Raising premiums risks losing customers in a price-sensitive market.
• Maintaining current pricing will likely reduce profit margins.

Potential Outcomes

Insurance companies may need to consider several options:

1. Absorb reduced profits
2. Raise base premiums
3. Limit customer savings to about 15% instead of the full 18% GST reduction

Industry Analysis

According to industry analysis, insurers may need to increase prices by 6-10% if input tax credits are eliminated. This could potentially counteract the government's objective of reducing end consumer prices and improving insurance penetration.

Next Steps

The GST Council is expected to finalize the details of this proposal in mid-September. The insurance industry and consumers alike will be closely watching the outcome, as it could significantly impact the insurance landscape in India.

As this development unfolds, it highlights the complex interplay between tax policies, consumer benefits, and industry profitability in the insurance sector. The final decision will need to carefully balance these competing interests to achieve the desired outcome of increased insurance coverage without unduly burdening the industry.

A group of Ministers on GST has put forward a recommendation that could significantly impact the insurance landscape in India. The proposal suggests a full exemption of Goods and Service Tax (GST) on individual life and health insurance policies, aiming to enhance affordability and expand insurance coverage across the country.

Ambiguity in Exemption Scope

While the recommendation signals a positive move towards making insurance more accessible, the specifics of the exemption remain unclear. There is ambiguity surrounding which particular insurance products will fall under this exemption, leaving both insurers and consumers in a state of uncertainty.

Potential Impact on Insurers

The proposed GST exemption comes with a catch for insurance companies. The removal of GST will also eliminate Input Tax Credit (ITC) benefits that insurers currently enjoy. This loss of ITC could potentially force insurers to recalibrate their base premiums to offset the financial impact.

Price Adjustment Scenario

Emkay, a financial services company, provided an illustrative example of how this change might affect pricing:

In this example, an insurer currently collecting Rs 100.00 as premium plus Rs 18.00 as GST might need to increase their base premium to Rs 106.30 to compensate for the loss of ITC benefits.

Expected Outcome for Consumers

Despite the potential increase in base premiums, the overall cost for end-consumers is expected to decrease. However, the exact reduction in price remains uncertain and may vary across different insurance products and providers.

Government's Stance

The government's intention behind this move is clear – to ensure that the benefits of GST exemption are passed on to customers rather than being absorbed into insurers' profit margins. This approach aligns with the broader goal of expanding insurance coverage in India by making it more affordable for the average citizen.

Shift in Insurer Focus

As a result of these changes, insurance companies are likely to shift their focus towards more stringent cost control measures. This could particularly impact areas such as commissions and operational expenses as insurers look to maintain their profitability in the face of changing tax structures.

Conclusion

While the proposed GST exemption on individual life and health insurance policies promises to make insurance more affordable for consumers, it presents a complex scenario for insurance providers. The industry now faces the challenge of balancing cost adjustments with the opportunity to expand their customer base. As the details of the exemption become clearer, both insurers and consumers will be keenly watching how this policy change unfolds and impacts the insurance landscape in India.