By IndiaHub 
However, this may not spell great news for policyholders, as this move could mean significantly higher premiums for them. Read on to know more about how slashing GST on health and life insurance premiums to zero could effectively defeat the purpose of making insurance more affordable for Indians.
What is the current rate of GST levied on insurance premiums?
At present, GST is levied at the rate of 18% on both health and life insurance policy premiums. This means that if you buy a life insurance policy which has a premium of Rs 100, at 18% GST, you will have to pay Rs 118 while purchasing the policy.
This 18% GST comes with input tax credit advantages. Under GST, businesses (in this case, insurers) can reduce their taxable liability by offsetting and claiming credits to the tune of GST they have paid on goods and services they utilised.
Naturally, the insurer incurs other expenses as well, such as maintaining an office, commission to agents, marketing expenses, etc. Since they are paying GST on all these activities as well, the government allows them to claim credits against the GST they have collected from policyholders and reduce their overall tax liability.
So, say you pay Rs 100 as a premium for the purchase of a life insurance policy, on which 18% (Rs 18) is charged as GST. Assume that out of this Rs 100, your insurer sets aside Rs 30 to pay office rent and Rs 40 to pay commission to agents. Remember that GST is being paid at the rate of 18% on both of these.
Hence, the total GST paid by your insurer comes to Rs 12.6, i.e. Rs 5.4 for rent and Rs 7.2 for agent commission. The insurer sets this off against the GST it has collected from policyholders (Rs 18), bringing its total GST liability to Rs 5.4.
What happens if the GST levy is done away with?
As per experts, in the absence of GST from customers, ITC credits will also likely be done away with, unless the government acts otherwise. Hence, insurers would still have to incur Rs 12.6 worth of GST expenses per Rs 100 of premium, but would have no GST collected from policyholders (Rs 18) to set it off against. They will have to make necessary changes in their finances to absorb this additional GST burden.
As a result, their overall expenses would rise, which would ultimately be passed on to the consumer.
Explains Hemik Shah, Co Founder Qian Insurance, “to determine if reduction in GST rate will help policyholders, we will have to first determine whether health and life insurance services are going to be considered as Nil Rated or will they be considered as exempt from GST. The answer to this will determine the eligibility of input tax credit. In case the services are considered as exempt, then input tax credit will not be available and therefore, the savings on account of GST rate reduction will be negated by the hike in premiums due to unavailability of credit”.
However, he further adds that if the health and life insurance services are classified as Zero Rated or Nil Rated, then credit will be available and can be used to set off GST liability of other lines of business. “In the absence of ITC, it seems unlikely that insurance companies will be able to pass on the benefits. This is because unavailability of credit will make the GST on goods purchased and services availed a cost for the insurance companies, which in turn may lead to hike in premiums to maintain profitability and solvency for the insurers”, he says.