Come July 1, the Goods and Services Tax (GST) would come into effect, which is slated to affect the prices of almost all consumer products and services currently offered. Claimed to be the biggest indirect tax reform since the Indian independence, experts are of the view that the GST is likely to have a positive impact on the Indian economy, with its power to reform the taxation apparatus in the country.
The services sector currently makes up for 60% of the GDP. Considering that, the GST is likely to have a deep impact on this sector. The life insurance industry forms a part of the service sector, which, as a result, will also be greatly affected by the upcoming GST. Let's take a look how the GST is likely to affect the insurance sector.
Life insurance is an industry which definitely has vast potential in India due to the financial cushion that it provides to individuals for taking care of their requirements at different stages of life. However, life insurance currently sees very low penetration in India, considering which, it could really benefit with a boost to not only create awareness but also increase its reach and coverage.
At present, life insurance services are taxed between the range of 1.5% to 15%. The rate of service tax applicable is decided depending on the type of policy, and is a burden which falls directly on the consumer purchasing the policy. The Revenue Neutral Rate (RNR) report released by the Chief Economic in December 2015 on GST laws proposed a standard GST rate of 18% for insurance services. On the condition that this proposition is approved and implemented by the GST Council, the rate of tax for the insurance sector is set to rise from 15% to nearly 18%.
Considering that the burden of indirect taxes is passed on to the end consumer, the increased 18% tax rate under GST is only likely to make life insurance all the more inaccessible to a larger number of consumers, which in return, will further lower the penetration level of insurance in the country.
In comparison to other countries like Singapore, Malaysia, Australia, Africa and many more where life insurance is a benefit provided by the government as part of social security, levying of taxes on insurance services is only going to deter more people from considering taking life cover for themselves and their loved ones.
Going by the assumption that on an average, a family spends about Rs.30,000 per year on life insurance premiums, excluding service tax. Keeping this figure in mind and given that the GST will hike the tax rate by 3%, the same family will not have to shell out Rs.900 more towards their insurance cover. However, with GST, the cost of insurance coverage for other policies like auto insurance and health insurance policies is also going up, the final brunt will be felt by the customer in the form of increased tax.
Following are the different types of life and health insurance policies which will be affected with the implementation of the new GST rate.
|Type of Policy||Current Rate||New GST Rate|
|Endowment Policies (1st year)||3.75%||4.50%|
|Endowment Policies 2nd year onwards||1.88%||2.25%|
The life insurance sector holds great importance not just in India but every developing country, providing its citizens a chance at accessing life insurance cover. At this point, one can only be hopeful about the Government addressing the concerns being voiced by experts in the industry.
GST of 18% is applicable on life insurance effective from the 1st of July, 2017