The old adage “change is the only constant” has probably had the biggest implication on the insurance industry in India following the implementation on goods and services tax (GST) in July 2017. Upon implementation, GST became the biggest indirect tax reform in the country and ushered in formalization and transparency in the economy. Under the GST regime, number of indirect taxes like excise duty, sales tax, service tax and other state and local taxes merged into one single GST, thereby making the entire process of taxation much simpler and transparent.

How GST reshaped the insurance sector in India?

For the multi-billion dollar life insurance market in India, GST has transformed economic activities significantly in the medium to longer term. GST implementation has raised the tax component in the premium of an insurance policy. Earlier, a service tax of 15% was charged on the premium. But under the GST regime, the tax component has increased to 18%. However, different types of insurance plans have been affected differently –

  1. Life insurance – GST is levied on that portion of the premium, which represents the cost of mortality. Therefore, different life insurance plans fall under different tax slabs. For instance, in case of term plans, where there is no maturity benefit the entire premium represents cost of mortality. Thus, tax is levied on the entire amount of premium.
  2. Health insurance - Health insurance policies have seen an increase in the premium rate. Compared to the earlier applicable 15% service tax, insurers would have to pay 18% on the GST imposed on health insurance plans.
  3. Automobile insurance - Motor insurance plans has become dearer as there is a tax increase of 3% on the overall premium. Whether insurers buy a comprehensive or a third-party motor insurance policy for their two or four wheeler, they are induced to shell out more.

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Life Insurance Market in India (2018-2023)
January 2019 | 66 Pages | SKU: 201854

Thanks to the rise in the insurance premiums following the implementation of GST, a storm has been triggered and there is cut throat competition among the difference insurance providers in the country to offer best of the best insurance plans to their potential clients. This is perhaps the ideal scenario for insurance buyers as these plans are eventually beneficial for them as far as their financial future is concerned.

When customers consider to buy an insurance policy, nothing changes in the selection process as the GST impact is the same across insurers. The good news, however, is some of the higher insurance cost has been offset as the tax on services availed by the industry are taken into account reduction of insurers' tax paid. Following the simplification of the state/centre structure of GST, administrative costs for insurers has been significantly lowered, thereby making the insurance industry capable of passing on the benefits of this indirect tax reform to end-customers.