CBIC Clarifies: No Input Tax Credit On Brokerage

The CBIC issued a set of FAQs clarifying on the taxation of various goods and services when the new GST slabs kick in from September 22. In its clarification the CBIC stated, “At present, insurers are
availing ITC on many inputs and input services such as commissions, brokerage and reinsurance, etc. Out of these input services, reinsurance services will be exempted. ITC of other inputs or input
services is to be reversed because the output services will be exempted.”

The GST Council in its meeting on September 3 had decided to exempt premium paid on individual health and life insurance policies from GST effective September 22, from the current 18 per cent rate.
Companies currently claim ITC on services utilized; these include distribution commissions, reinsurance and promotions/other operational expenses. While a GST exemption will make policies cheaper for individuals, it creates pressure on insurance companies' margins, as they will lose the benefit of ITC that they could earlier claim on their expenses.

Non-life insurance companies that have a more diversified business such as motor insurance, property, aviation, marine insurance may see a lower impact on the balance sheet due to loss of ITC benefit compared to pure health insurers with a higher share of individual health business. Life insurance companies too would be impacted significantly.

A senior official of a large pure health insurance company said, “The partial reduction in health insurance premium would be around 13-14 per cent for policyholders. With insurers being deprived of the benefit of ITC, they will devise various strategies to compensate for the loss of ITC currently availed of. We may have to raise the premium rates, while some may decrease the sum insured or reduce distributor commissions or introduce co-pay plans, restructure the plan features
or do a combination of all of these.”

“General insurers offer other lines of businesses and so will cross subsidize the loss with other lines and would be able to absorb the impact,” added the official.

Girija Subramanian, Chairman and Managing Director (CMD) of the largest general insurer, New India Assurance in an interview said that the insurer has decided to pass on the entire benefit of GST reduction to policyholders. "The premium part of policies will remain the same and the GST part of the premium be complete waived. Therefore, the total cost outgo to the insured will be to the extent of GST waiver," she said.

New India has also decided not to cut intermediary commissions, unlike some other insurers, Subramanian said.

“A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5 per cent for new and existing policies; this will help the companies compensate for the
loss of input tax credit that is currently availed of. At the same
time, a 12-15 per cent reduction in price (with 0 per cent GST and 3-5 per cent tariff hikes), for the customer can potentially boost health insurance demand. We await commentary from life and general insurance companies,” said Kotak Institutional Equities in a report.