GST Exemption on Individual Policies to Benefit Health and Term Insurance Holders: Experts

Rapid Summary:

• teh Center has proposed exempting individual life and health insurance policies from GST, reducing the current 18% rate to zero.A group of state finance ministers has recommended this exemption to the GST Council.
• The final decision is expected next month by the GST Council.
• Tax experts highlight that exempting these policies would be most beneficial for term and health insurance policyholders due to their lower premiums when compared to other types of policies like ULIPs or customary life insurance plans.
• Exemption might lead to cost increases as companies lose input tax credits (ITC) on expenses such as commissions, rent, and reinsurance costs. This could impact consumers by reducing potential price cuts.
• Experts suggest a “zero-rated” system instead of exemption so companies can claim refunds for paid GST, resulting in greater price reductions for policyholders.
• specific valuation rules attribute taxable supply only to premium portions that cover “risk,” excluding savings/investment components in traditional life insurance or ULIPs.

Indian Opinion Analysis:

The proposed GST exemption on individual health and life insurance policies represents a commendable step toward improving affordability for essential coverage,particularly term and health plans which cater directly to risk management without investment components. However, experts caution that implementation design will play a crucial role in determining its actual benefit. As direct repercussions of ITC blockages emerge, insurers may transfer these additional costs onto consumers rather than absorbing them-diluting anticipated cost reductions.

Notably, while reduced prices are likely for term and health insurances given their straightforward structure without investment portions in premiums, exemptions may have limited impact on traditional life insurances or ULIPs due to embedded expenses arising from lost tax credits.

This move highlights India’s broader intent toward increasing financial protection accessibility but requires careful structuring by the government via mechanisms like zero-rated taxation methods if it aims at delivering importent consumer relief consistently across all policy types.

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