Impact of GST on Insurance Sector
GST is having an important impact on the insurance industry as well as policyholders. Typically, policyholder's pay service tax on the risk element of the premium component whereas the investment element of the policies is usually out of the service tax scope. With the implementation of the GST, insurance policies including life, health and motor have become costlier as taxes will go up by at least 3 % or 300 basis points.
Primarily, there are three major kinds of life insurance products – Term insurance plans, Ulips and Endowments (including money back). The applicability of service tax (in the current format) on their premium is not similar in all three of them.
The premium paid in life insurance policies represents two portions – risk coverage and savings. The service tax is only on the risk portion of the premium and not on savings portion.
1. Term Plan
Term plans purely offer death benefit and are termed as pure risk protection plans. In such plans sum assured is paid to the nominee, if insured dies during the term of the policy.
The premium component of a term plan comprises the majority of the risk element to provide insured a risk cover throughout the tenure of the policy. At present, service tax of 15 % is imposed on the premium cost of the term plans. As per rates declared GST rates will be 18%. This means the premium will get costlier by 3 % or 300 basis points.
2. Endowment Plan
Endowment plans or traditional insurance savings plans offer both death and maturity benefits, whichever occur first. Currently, endowment plans attract a service tax of 3.75 % on the premium in the first year of the policy and will rise to 4.5 % in the first year under the new tax regime. As of now, 1.875 % of the service tax is levied on endowment plan's premium for the second year, which is expected to rise to 2.25 % from the second year onwards after the implementation of GST.
3. ULIP
Unit Linked Insurance Plans (ULIPs) also offer dual benefit of insurance and investment. At present, service tax of 3.5 % is levied on protection part of ULIPs in the first year and 1.75 % from second year onwards. This would go up to 4.5 % in the first year and 2.25 % from second year onwards.
Similar will be the impact on general insurance such as car, health and other non-life policies i.e. service tax (when replaced by GST) will increase by 3 percent of the premium amount.
Health Insurance Plan
In current tax regime, health plan premium attracts a service tax of 15 % on its premium cost. With the introduction and implementation of the GST, the cost of purchasing the health insurance will become expensive as it will attract a tax of about 18 % on premium from July 2017.
Motor Insurance
Motor insurance premium also attracts the service tax of 15 %, which will rise to 18 % from July 2017, if the rate is fixed up to this specified percentage mark.
