Source: BS
Context:
Following the nil GST on individual life and health insurance premiums announced by the GST Council, life insurers face a financial impact due to the removal of Input Tax Credit (ITC). The Life Insurance Council, representing insurers, plans to approach IRDAI to pass part of this burden to distributors by reducing commissions.
Rationale:
- To protect margins of insurers while maintaining affordability for policyholders.
- To accommodate differences in commission structures across insurers and distributors, a uniform approach may be challenging.
GST & ITC Background
- GST Council exempted all individual life insurance and health insurance policies (including term, ULIPs, endowment, family floater, and senior citizen plans) from GST.
- This exemption aims to:
- Boost insurance affordability.
- Expand insurance penetration across India.
Input Tax Credit (ITC)
Input Tax Credit (ITC) allows businesses to reduce the tax they have paid on inputs (goods or services purchased) from the tax they are required to pay on their outward supplies (sales). In simple terms, ITC ensures that tax is levied only on the value addition at each stage, preventing tax-on-tax (cascading effect).
Example:
If an insurer pays GST on services like agent commissions, office rent, or IT systems, they can normally claim credit for this GST against their output GST liability.
ITC Implications:
- Denial of ITC on commissions paid to agents (18% GST) increases costs for insurers.
- While reinsurance services remain exempt from GST, ITC on other inputs for individual policies is not available, affecting the cost-benefit transfer to policyholders.
- Despite ITC removal, insurers passed the nil GST benefit to customers starting Sept 22, 2025.
