What is GST?
GST, or Goods and Service tax, is a tax reform that aims to streamline the tax structure. The Lok Sabha passed the GST bill on August 8, 2016. This sparked many political debates, clashes, and obstacles. Finally, on July 7, 2017, GST was implemented with the concept of "one nation, one tax."
Gst's Impact on the Insurance Sector
Previously, the insurance industry was subject to a separate service tax. This rate is approximately 15%, which includes 14% basic service tax, 0.5% Swachh Bharath cess, and 0.5% Krishi Kalyan cess. The service tax was absorbed into GST as the country implemented it.
Because the insurance sector falls under the services sector, the new GST is levied on all insurance-related services. As a result, the insurance GST rate will be 18% beginning July 1, 2017, instead of the previous 15%. This 3% tax rate increase has resulted in raising the premium accordingly. The effect of GST on the premium varies depending on the policy.
GST & Health Insurance
GST, in the case of health insurance, applies to the whole premium amount and not only the risk component of the premium, as in the case of life insurance. The following is the example to show the scenario before and after GST -
Example- Let us assume the policy coverage is INR 5 Lakhs, and the premium amount is INR 10000.
Before GST- Tax was 15%, hence premium payable was= 10,000 + 1,500 = INR 11,500
After GST- GST rate- 18%, hence premium payable= 10,000+1,800+ INR 11,800.
Thus, GST has led to an increase in the premium of health insurance.
The medical devices and equipment which were earlier taxed at over 13%, including all the taxes, are now taxed at 12% under GST. This has led to the benefit of at least 1% in the cost of the medical equipment, which will directly impact the consumer as the price will be lower and, correspondingly, the health insurance claim amount will be lower.
GST & Life Insurance
For life insurance, GST, which is levied, is calculated in the following manner:
The premium is reduced from the amount allocated for investment in the case of policies with investment benefits.
Example- For ULIP Policy, it is calculated as below:
Total Premium-Amount for investment
It is computed as 10% of the policyholder's premium for single premium policies with annuity options.
Impact of GST on Endowment Plans
The GST computation for the endowment plan is based on the premium. In the first year, it applies to 25% of the premium, and in the second and onwards, it is 12.5 % of the premium. If the premium for an endowment plan is INR 2,00,000, then 18% GST is calculated on the premium of 25%, which is 50,000 for the first year and 25,000 in the second year and onwards. The GST for the first year thus comes as INR 9,000 and INR 4,500 for the second year.
General Insurance Plans Are Subject to GST
The GST rate is 18% of the total premium for general insurance plans such as health insurance plans, vehicles, marine insurance, and fire insurance. This is 3% higher than the previous service tax of 15%.
Term Plans
Earlier, a 15% service tax was levied on the premium of term insurance plans. After the update is implemented, the tax will be hiked by 3% to 18%. The 18% GST will be levied on the first-time insurance policy purchase or renewal.
It means that for the payment of every 100 rupees (towards the premium), a service tax of INR 15 was levied, which is now going to be INR 18.
Read more - Types of Term Insurance Plans
GST Exemption Policy
The Government of India does not collect any GST on the premiums for some life insurance contracts. Some of them are - Jayashree Bima Yojana, Pradhan Mantri Jan Dhan Yojna, Aam Aadmi Bima Yojna, etc. All of these give benefits to policyholders by keeping insurance costs low.
GST and the Insurance Industry
With most insurance premiums increasing by 3%, insurance providers have a fierce rivalry. Companies in the insurance industry strive to keep the premium low in a highly price-sensitive market.
Companies have upgraded service to retain customers and demonstrate uniqueness. Many insurers, for example, provide flexible payment alternatives such as EMIs that allow clients to pick between month-wise, year-wise, or quarter-wise payment of premiums.
If the premium offered by the competitor is not considered while launching new insurance policies, it may happen that customers will switch to other providers.
Conclusion
The implementation of GST has undoubtedly increased prices for most insurance contracts. However, the increase in the costs is not massive in absolute numbers. Still, you should choose a policy that provides adequate protection for the least price.
With so many insurance companies in the market, everyone can compare and contrast the characteristics of the policies to find the one that best fits their budget and demands. By choosing the right insurance plan, you can save your hard-earned money.
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