A contentious debate has erupted between the insurance industry and policymakers over proposed changes to the Goods and Services Tax (GST) structure for health and individual term life insurance policies. While the government's proposal aims to provide relief to policyholders, insurers are raising red flags about potential unintended consequences.

Government's Proposal: GST Relief for Policyholders

The government is considering exempting health and individual term life insurance premiums from the current 18% GST levy. This move is designed to reduce the financial burden on policyholders, making these essential insurance products more affordable and accessible to the general public.

Insurers' Concerns: The Input Tax Credit Dilemma

Despite the apparent benefits for consumers, the insurance sector has voiced significant concerns about the proposed changes. The primary issue revolves around the potential loss of Input Tax Credit (ITC) if a full GST exemption is implemented.

Currently, insurers can claim ITC to offset taxes paid on various operational aspects, including:

• Commissions
• Reinsurance
• Technology
• Distribution
• Administration

If the GST exemption is applied without addressing the ITC issue, insurers warn that it could lead to an increase in their operational costs by 7-10%.

The Inverted Duty Structure Challenge

The continuation of the inverted duty structure is at the heart of the insurers' concerns. This structure could potentially negate the benefits of the GST exemption, as it would increase costs for insurance companies while simultaneously reducing costs for policyholders.

Industry Appeal and Government Response

In response to these concerns, the General Insurance Council has written to the Finance Ministry. Their request is clear: implement a complete GST exemption on health insurance to address the potential negative impacts on the industry.

However, sources close to the matter indicate that the Finance Ministry is unlikely to eliminate the inverted duty structure on health insurance. This stance suggests that the government is prioritizing consumer benefits over industry concerns in this particular policy decision.

Implications for the Insurance Sector and Consumers

The proposed GST changes present a complex scenario with potential winners and losers:

• Policyholders: Stand to benefit from reduced premium costs if the GST exemption is implemented.
• Insurers: Face the prospect of increased operational costs due to the loss of Input Tax Credit.
• Insurance Industry: May need to adapt to new financial realities, potentially affecting product pricing and offerings in the long term.

As the debate continues, stakeholders from both the insurance industry and government will need to work towards a solution that balances consumer affordability with the financial sustainability of the insurance sector. The outcome of this dispute could have far-reaching implications for the future of health and term life insurance in India.

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.