GST or Goods and service tax has been a rather controversial topic ever since it has come into existence since the year 2017 but the concept of Goods and Service Tax (GST) is quite easy to understand. Each and everyone has a diverse or mixed point of view when GST is discussed. From the time GST has been put into enforcement, it has had an effect on each and every sector in some or the other way and the insurance sector is no different.
The Goods and Service Tax has had a major influence on the type of insurance most individuals are keen to purchase and that is the good old Life Insurance. GST is levied on the public through life insurance because earlier service tax was collected when one purchased insurance as it is a service provided to the common man. Due to this price of premium has leaned toward the higher side. However, GST also has a positive influence on the insurance sector that will be discussed further.
What Exactly is GST?
You need to understand what exactly GST is exactly before exploring the effects of GST on the insurance sector. Earlier, indirect taxes in the form of service tax, entertainment tax, excise duty etc. were levied upon the consumer due to which a bunch of taxes collected were beyond the understanding of the common consumer. Not only were they unnecessary they also were extremely perplexing, overburdening and oppressive in nature. Taking all these factors into consideration, all these indirect taxes were accumulated all together into one and thus came into existence- The GST. The Goods and Service tax made sure that all the assorted taxes came under one roof making the process of taxation uncomplicated.
Different GST Rates on Life Insurance Plans
All Life Insurance Policies are subject to varied rates of GST. These rates are further explained below:
Term insurance is subject to 18 % GST which is rather inexpensive as it covers mortality costs only which means that if your annual premium comes up to INR 7,000(for a cover of INR 1 crore ) then a number of INR 1260 will get deducted as GST charges. In the same way, the add-ons that you have probably chosen in your term insurance policy then an additional 18 % will be deducted as GST charges for the premium that you will be paying for that particular add-on.
U-lips (Unit-Linked Insurance Plans)
Again on a Unit-Linked Insurance Plan or U-lip, a charge of 18 % is levied as GST upon the consumers. Under this, all kinds of costs are capped which includes premium charges and costs for fund management. A portion of the premium paid for a U-lip goes for insurance and another portion is devoted toward investment. No GST charges are levied upon the money invested net of costs.
Traditional Life Insurance Policy
In case of the good old traditional life insurance policy, where insurance and investment are incorporated together, GST charged is 4.5 % for a premium paid for the initial one year and then goes to 2.25 % on premiums for the consecutive years. That means, according to the plan chosen, if your annual premium comes up to INR 15,000 for instance, for the initial first year you will be paying a sum of INR 675 as premium and for the following consecutive years you will be paying roughly a sum of INR 337.
Pension Plans and Annuities
As the sum paid for pension plans and annuities is paid en masse or a complete sum of money is paid all at once and for that, you receive annual compensation of earnings in return, a charge of 1.8 % is levied upon the insurance policyholder as GST. This signifies that if you pay a total amount of INR 10 lakh and receive a yearly earning of INR 80,000 then GST charged would be INR 18,000 on the 10 lakh INR that you will be paying together.
Changes in the GST Rates
It is possible for the individuals paying insurance premiums to soon experience a cut back in the costs of insurance overall including Health Insurance and Life Insurance. It is a recommendation that has been requested by the Insurance Regulatory and Development Authority of India or IRDAI to the Union Ministry of Finance to curtail the taxation charges of GST from 18 % to 5 %.
The insurance industry has extended an appeal before the Union Ministry of India as it has been observed that the purchase of insurance in the Indian market is still not very rampant because of which the high charges of GST levied upon the consumer will not promote business. If the tax comes down from 18 % to 5 % then it would aid the purchase of insurance by the Indian consumer.
Considering the pandemic that wreaked havoc in every individual’s life, more and more people are looking into purchasing an insurance policy as the life-threatening disease COVID-19 has no cure yet and thus prompting people to invest. This can be the perfect time to strike the iron when it's hot and reduce the rates of GST charges thus promoting the acquisition of insurance by the masses.
Although it would be a rather challenging task for the insurance representatives to convince the Union Ministry of Finance to accept the proposal as the pandemic is the cause of the major slack in the economy and it is highly improbable that the proposal to decrease the tax charges would be considered.
The proposal to decrease tax charges from 18 % to 5 % has been made by the insurance industry at multiple occasions and the proposal will garner attention only if the fitment committee takes up the offer, conducts proper research, and hands over the proposition before the GST council who will consider sanctioning the proposal only after the above procedure has been met.
Since GST is a combination of many indirect taxes that were levied before the general public would be of the opinion that all goods and services have become costlier because of this transformation. It sure may have made a little difference in the prices here and there but there is nothing more important than life itself. It’s not that you must not look into the price point of goods and services before purchasing them but if we are able to secure our lives with life insurance, meager cost hikes should take a backseat and there could be a possibility that the tax charges may reduce in the coming future.
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