Insurers Meet DFS Officials to Discuss Input Tax Credit
While reinsurance has been exempted, commissions remain taxable.
Mumbai: Top officials of insurance companies on Wednesday met officials from the Department of Financial Services (DFS) to discuss the impact of the government’s decision to exempt individual life and health insurance policies from Goods and Services Tax (GST) but deprive insurers from the benefit of availing Input Tax Credit. Insurance companies want the government to continue to apply GST on renewal premiums.
“The meeting was to discuss Rule 42 of CGST that deals with Input Tax Credit Reversal,” said a top official of a private insurance company. Insurers currently claim input tax credit (ITC) on services utilized; these include distribution commissions, reinsurance and promotions/other operational expenses. While nil GST would lower the premiums and help stimulate demand, the classification of these services as “exempt” means that insurers will lose access to input tax credits on expenses linked to such policies. Insurers will be required to reverse input tax credits relating to these exempt outputs. This embedded tax could eventually feed into the costing structure, thereby impacting the profits of the insurance companies. According to reports, insurers want the government to allow ITC on renewal premiums. They also want commission expenses to be exempt from GST. While reinsurance has been exempted, commissions remain taxable. According to insurers, this creates an inverted duty structure, where tax on inputs exceeds tax on the final product, leading to unclaimed credits and higher costs. Reinsurance and commissions together account for nearly 90 per cent of insurers’ total expenses.
Effective September 22, the GST Council has exempted term life, unit-linked insurance plans (ULIPs), endowment policies, family floater health covers, and senior citizen plans from GST. Reinsurance linked to these policies has also been exempted. Until now, premiums have attracted varying GST rates. Health insurance, ULIPs, and term life were taxed at 18 per cent, while endowment policies carried 4.5 per cent GST on the first premium and 2.25 per cent on renewal premiums. Single premium annuity policies were taxed at 1.8 per cent.
