The Goods and Services Tax (GST), which has come into effect from July 1 st, 2017 has brought about a myriad of changes in the Indian economy. Different sectors are being affected according to the tax slabs that they are congregated in. GST has an impact on almost all consumer products and services including the insurance industry. The services industry makes up for 60% of the GDP and the insurance industry is an integral part of this service industry, which will be adversely impacted.
Currently, life insurance services are taxed between the range of 1.5% to 15% depending upon the nature of policy taken by a consumer. As per the new tax regime under GST, the taxation for this sector has increased from 15% to 18%. This hike in tax from 15% to 18% will have the effect of increasing the premium of purchasing a new policy in addition to renewing an existing policy. For example, if a family spends about Rs. 30,000 per year on life insurance premium excluding service tax, the GST hike of 3% will now come into play and the family will have to pay an additional tax of Rs. 900 on their premium.
Life insurance companies will in turn pass on this tax burden to the consumers and consequently, life insurance premiums will rise by 3%. This will have a detrimental effect in the country where consumers will become hesitant to shell out more premium than what they are already paying. Life insurance is not a luxury but also a basic necessity as there are many families where there is a single earning member in the family. Suppose something untoward happens to him which results in his death – the life insurance policy (if he has taken one) will help his family to survive financially even after the concerned person’s death. Life insurance potential in India has reduced from 4.6% in 2009 to 2.6% in 2016 and is not reflecting any growth in the last couple of years.
It is not only life insurance premiums which will be hit but premiums under auto, motor and health insurance will also rise under the new tax law.
The premiums under life insurance have two components – the savings and the risk coverage. Service tax is levied only on the premium component.
There are 3 types of life insurance:
- Term insurance plans – These are basic life insurance policies. Service tax of 15% was levied on the premium of term plans previously which is now hiked by 3% to 18%.
- ULIPs – These are plans where insurance and investment are under a single integrated plan. Under GST, consumers will have to pay 18% tax on availing the benefits under these plans.
- Endowments (including money-back) – Life insurance policies that pay a lump sum on maturity/death or a fixed sum every month are called endowment plans. These are basically traditional insurance saving plans. Previously, these plans used to attract a service tax of 3.75% on the insurance premium while buying an insurance plan. It is now increased to 4.5 percent under GST. Consumers will have to pay 1.88% service tax on the premium payment of their endowment plan(s) if they are renewing it for the second time.
The hike rate on insurance premiums under GST is marginal but it will impact policyholders as they will have to shell out more premiums for their existing policies. It may have the effect of de-motivating new consumers from taking new life insurance policies.
