GST exemption could take a toll on insurers' health

MUMBAI: Exempting life and health insurance premiums from the Goods and Services Tax (GST) could leave policyholders paying less, but the move may also squeeze insurers' margins and prompt them to rework pricing. A group of ministers has recommended entirely removing the current 18% GST on insurance.

At first glance, this appears to be a direct saving for customers. But industry executives caution that insurers will lose input tax credit (ITC) on expenses such as commissions, rent, power, and telecom bills, which currently offset a part of their tax outgo.

In protection products, commissions initially range between 35% and 40% before tapering off, averaging about 5-6% over time. On top of this, insurers incur about 10% in other expenses. Currently, service tax of around 2% on such costs is offset through input tax credits. If GST exemptions remove that credit, insurers will have to bear the additional expense.


The term-insurance market is fiercely competitive. If insurers reprice policies upward, they risk losing customers and if they don't, margins will take a hit. Companies could either absorb the hit by reducing profits or raise the base premium or cut customer savings to about 15% instead of the full 18%.

"The term-insurance market is extremely competitive," wrote Nilesh Sathe, former Irdai member, in a LinkedIn post. "Hence, if some companies decide to withdraw their existing plan of insurance and reintroduce it with a higher premium, they may lose the market. If they don't increase the premium, their profitability may go down. It is for the companies to decide if they want to operate at a reduced margin or lose market share."

Come September
The group of ministers panel is set to submit its proposal to the GST Council. The council, in its reviewing meeting mid-September, is expected to come out with the final details. "Every company's cost structure is different, but losing the credit means higher effective outgo on commissions and expenses. This will force insurers to make adjustments on their balance sheets," said a senior industry executive. "After the tax cut happens, insurers could rework pricing as the move may also squeeze insurers' margins." Currently, there is no input tax credit availed on the 5% and nil GST slabs.

"The issue is if ITC can't be availed when GST is scrapped, then insurance companies on the contrary will have to hike prices by 6-10% based on our channel checks," said Suresh Ganapathy, managing director, head of financial services research, Macquarie Capital. "That will defeat the basic purpose of reducing GST as the government's main objective is to reduce the eventual prices for the end consumer, spur demand and improve penetration."