What is GST?
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Goods and Services Tax, popularly known as GST, is a reform for our
economy’s indirect tax plan. On 8th August 2016, GST Bill (which was
long pending) was passed in Lok Sabha.
It was possible after a very long journey flooded with challenges,
confrontations, and what not. At last, the GST bill has entered the phase
of implementation, which will come into effect from July 1, 2017. GST
would make changes in the tax structure between the center and the state.
GST is a VAT, i.e. Value Added Tax that will eradicate the cascade
effect/ double taxation from the price of goods and services down the
value chain. It would surely affect the incidence, structure, and
calculation of the indirect taxes, which will lead to a comprehensive
refurbishment of the current tax system in India.
The latest GST is expected to freeze at 18 percent under the GST update.
This is a bad news for all the policyholders, as this hike will impact
adversely on the insurance sector, typically in terms of insurance
premiums. Life insurance reach in India has reduced from 4.6 percent
in the year 2009 to 2.6 percent in the year 2016. It reflects a no growth
at all in the last a few years. The hike in the GST from 15 percent to
18 percent would increase the premium of purchasing a new as well as
renewing an existing insurance policy.
The Premium Deciding Factor
Basically, the premium deciding factor of an insurance plan is subject to
the insurance plan type
you want to purchase. Based on that, we have two major categories of
insurance policies – Life Insurance and General Insurance.
Life Insurance
A contract between and individual and an insurer, a life insurance
policy provides an assured
sum of money to a designated nominee upon the death of the
policyholder, which is in exchange
for a premium.
Life insurance policies are sub-divided into four categories, i.e. Term
plans, Pension plans, ULIPs,
and Endowment plans. The service tax levied on these different
insurance instruments is also different.
A Term plan offers death benefit and is defined as a risk-free plan.
The nominee gets the sum
assured if the insured person dies during the policy term. The policyholder
doesn’t get any maturity
benefit in a basic term plan. There are some term plans that offer the return
of premium (TROP) benefit.
The premium element of a term plan mainly includes the risk component in
order to provide an insured
person with a risk cover as long as the policy is active.
ULIPs and endowment plans provide coverage benefit and death maturity
whatever instance occurs first. These plans compute investment and risk
in the premium element
and it makes these plans expensive in the comparison with a term plan.
The Impact on your Life Insurance Premium
A policyholder pays service tax only on the risk factor of the premium
element, whereas the
investment component of the insurance plans usually isn’t included in
the service tax umbrella.
After the GST is implemented, insurance plans, including life, motor,
and health would become more
expensive, as taxes would be hiked.
Term Plans
Earlier, 15 percent service tax was levied on the premium of term plans.
After the updated is
implemented, the tax would be hiked by 3 percent and it will be 18 percent. The individuals buying
insurance plans for the first time or renewing their existing insurance
policies would have to pay 18
percent GST.
It means that that for the payment of every 100 rupees (towards the
premium), a service tax of
Rs. 15 was levied, which now it is going to be Rs. 18 as per the updated
tax plan. To be precise,
the premium will be increased by 3 percent.
Endowment Plans
Endowment plans are considered as one of the traditional insurance saving
plans.
Previously, these plans used to attract a service tax of 3.75 percent
on the insurance premium
while buying an insurance plan. Now, it would be increased to 4.5 percent
as per the
updated tax regime. Now, the policyholders are supposed to pay 1.88
percent service tax on
the premium payment of their endowment plan(s) if they are renewing
it for the second time.
Travel Insurance
Those who are looking forward to traveling abroad anytime soon will also
have to pay an
additional tax of 3% as the new GST will be in effect from July 1.
The customer will now have to
pay 18% GST instead of 15% service tax earlier in effect. So,
if you don’t want to pay more
money than buy or renew travel insurance before 1st July 2017.
What would be the ideal way out for the
insurance buyers?
It is of utmost importance for a person to safeguard his/her life.
This becomes even more important
in case a person is the sole bread winner in his family. Life insurance
policies, particularly the term
plans, are the life insurance plans in the true sense. These policies
provide the coverage to you and
compensates financially so that when you are not there, you can still
look after the financial needs
of your family members.
When you look forward to buying an insurance policy, pay your
When you look forward to buying an insurance policy, pay your
undivided attention to the variants
of the insurance plan, including its overall benefits, disadvantages,
inclusions, exclusions,
policy coverage, policy term, its premium etc. Keep in your mind
that premium should not be the
only criteria for selecting or rejecting an insurance plan.
Otherwise, you would end up depriving
your family of the overall financial coverage that they rightfully
deserve if you are no more because
of any unfortunate incident, such as death, total or partial disability,
terminal illness etc.
Thanks to the rise in the insurance premiums, a storm would be
triggered and there would be a
cut throat competition between the insurance providers to offer best
of the best insurance plans to
their potential clients. This would be beneficial for them as far as
their financial future is concerned.
It is recommended to draw a comparison, shop around, and then
purchase an insurance plan
that suits your insurance requirement, structure, objectives, liabilities,
and budget of you and
your family.
The Relationship between the GST Rule
and Life Insurance Business
The insurance policies’ premium represents two components- savings
and risk coverage.
The service tax is levied specified only on the premium component.
According to the GST rules, the value of service on which the GST
is levied regarding the life insurance sector shall be accordingly.
The gross premium would be reduced by the amount allocated for or savings or investment on policyholders’ behalf.When it comes to the single premium annual policies, ten percent of the single premium would be charged from the policyholder.In other cases, 25 percent of the premium for the first year and 12.5 percent of the premium in the upcoming years will be charged. For example, if an endowment plan’s premium is Rs. 100, then the 18 percent GST would be levied on the 25 percent of premium (which would be Rs. 25) the GST would be Rs. 4.50.In case the total premium paid by the policyholder is towards the life insurance’s risk cover, only the 18 percent GST would be levied on the total premium.
Because of the increased GST percentage that awaits the implementation.
The overall impact of the GST would be the increased
expenditure (premium and the increased GST), when it comes to
term insurance and endowment plans.
The policyholders stand a chance to be benefited
if the insurance providers get a green signal on the input
tax credit benefit. Unfortunately, as of yet, it is still
unclear since the center/state GST structure is very complex.
It might create confusions and conformity for the insurance
buyers and increase the administrative expenses for
the insurance providers. If the insurance buyers remain
confused about the GST update, then irrespective of the increase or
decrease in the prices, the solvency of the market along with the
financial strength will be adversely affected.
The general insurance sector will be equally impacted.
The overall outgo for health, car, and various non-life
plans would be increased by 3 percent.
Post GST implementation, the existing and new insurance
buyers would have to bear the updated prices. For example,
the current insurance premium of a term plan is Rs. 10,000,
(without the 15 percent service tax) the updated GST will
increase the premium comprising taxes by Rs. 300.
It means from Rs. 11,500, it will be changed to Rs. 11,800.
When you compare insurance premiums, especially for the term
plans, ensure that you look out for the premiums including or
excluding GST by the various insurance providers. There should be no changes in the selection process, as the GST impact is the same for
all the insurance providers. Follow a proper selection process in order to
get the right insurance plan that offers you maximum coverage and fulfills your insurance expectations. This table will help you to get a better understanding of how the updated GST impacts the various insurance products and to which extent.
GST Rates: Before and After
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New Insurance Rates After GST
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Insurance Product
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Before
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After
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Applicability
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Term Insurance Premium
|
15
|
18
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On the entire premium amount
|
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ULIP
|
15
|
18
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On the premium amount minus the
investment amount
|
|
Health Insurance Premium
|
15
|
18
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On the entire premium amount
|
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Add-on Riders Premium
|
15
|
18
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On the entire premium amount
|
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Periodicity – Single Premium
|
15
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18
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On 10 percent of the total premium.
It means that the previous 1.5 percent
of the total premium would be hiked to
1.8 percent of the total premium as per
the updated GST rates.
|
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Endowment Plan Premium (First Year)
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15
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18
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On 3.75 percent of the total premium
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Endowment Plan Premium (Renewal)
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15
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18
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On 1.875 percent of the total premium
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Car Insurance
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15
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18
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On the entire premium amount
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As of now, service tax comprises of Swacch Bharat Cess (SBC) along
with the Krishi Kalyan Cess (KKC).
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Wrapping it up!!!
Though the hike is nominal, the increased insurance premiums seem
too much for a
major section of policyholders. If someone is spending
Rs. 50,000 on the annual premium
for home, motor, medical, personal accident insurance, and
term plan, they will have to pay
18 percent more. They won’t get any additional benefits or
coverage. In this article,
you got to know about the impact of the updated GST on the
insurance sector. In true
sense, the real impact of GST on the policyholders will come
out after its implementation.
For the existing policyholders, as of now, there is no change
required to be made prior GST
implementation.