GST Impact on Health Insurance Premium

What is GST?

The Goods & Services Tax was implemented in 2017. All the indirect taxes such as the service tax, excise duty, VAT, etc. are henceforth subsumed under this single tax, that helps the tax-payers understand the process of tax-payment, It also helps in making the business transactions in a smoother way.

The GST is divided into two parts, State GST and Central GST for the ease of division of revenue between the centre and the states. That is a wholly technical segment of GST mechanism. One of the major functions of GST is that it eliminates the chances of double taxation down the value chain that existed earlier, which resulted in a huge tax burden as a whole.  

GST and Insurance

Before the GST regime was implemented, there was a 15% service tax on health insurance. That 15% consisted of basic service tax of 14%, Swach Bharat Cess of 0.5% and lastly the Krishi Kalyan Cess of 0.5%.

After the introduction of the GST regime, the service tax has been revised upwards, and it stands at 18% now. So there has been an increase of 3% than earlier tax rate or a 300 basis point rise in the cost of insurance. New GST rule is to be followed by those who are looking for new insurance policies or renew their existing policies.

The tax hike has influenced health and other insurance products in a wholesome way because the premium structure sees a broad change due to it. We can understand this change in the laymen’s terms so that everyone, irrespective of having insurance knowledge or not, can understand it.

Let’s say you have purchased one health insurance plan worth Rs. 8 lakh, which is the sum insured by the insurance company and you have to pay Rs. 20,000 annually as the premium.  

The GST added premium would be Rs. 23,600 where there will be an amount of Rs. 3,600 added to the premium as the tax. And that tax is calculated at 18%. Earlier you would have been paying just Rs. 3000 rather than the current extra amount of Rs. 3,600.

Advantages of GST

Of course, not all is negative about GST on Insurance in India. Certain new aspects came up into the insurance sector due to this tax hike after implementation of GST.  

Yes, the tax on health premiums has increased. But how has it helped the person buying insurance? It has helped by means of competition in the market. Let’s explain.

As the premiums increase due to hike in the tax rate, the insurance companies are getting worried about their eroding customer base because an average Indian in general and a policy-buyer in particular, is always anxious about an upward premium rate. Simply put, GST or new tax rates affect the insurance premium, due to which customers hesitate to buy insurance and this will eventually affect the insurers’ business.

So, what these companies do is, they have started introducing health insurances at very affordable costs, and these prices are lower than earlier.  Apart from the price advantage, the customer gets to experience a less-cumbersome policy purchase process as well as claim registration process. The insurers make sure that no non-tax barrier is there for the buyer. From their perspective, the companies are cutting down costs involved in issuing policies. This is a saving for them.  

In totality, the GST has made the whole process a lot less cumbersome to rollout.

Disadvantages of GST

You never get all the benefits without tasting a little sour side.

Certainly, after all these procedural advantages, a few points need to be remembered about the new taxation regime. As per the new rule,it is applicable not only on new policy-buyers but also the existing policyholders, those who purchased health policy earlier would have to pay the increased amount of premium.

Another major impact would be around the notion of the insurance itself. As insurance is considered as service under the GST regime, there will be no input tax credit facilities available for individual policyholders. The tax advantages, availed by group policyholders will be gone too.

Before the GST, the pure risk term insurance premiums were taxed at 15%. Due to the presence of an investment component in the Unit-Linked Insurance Plans and Endowment Plans, their premiums were subjected to a concessional rate of service tax. For the initial premium, the concessional rate was 3.75%, and for renewal premiums, the rate was 1.875%. After the arrival of the tax hike, with the GST being 18%, for new insurance buyers, the first-year premiums will be 4.50% whereas the renewal premiums will be 2.25%.

The ULIP charges that were hitherto taxed at 15% will now be taxed at 18%. 1.5% service tax was imposed on single premium annuity policies, which will now be 1.8%.

In model GST, there is no concession for Endowment and ULIP policy. But requests are made to the Government to extend this earlier provide concession to the ULIP and Endowment policyholders. All non-life insurance policies include health policies, home insurance, motor insurance, etc. And all these will be impacted by the revised rate.

To Conclude!

From the above explanation, one can contemplate the risks and the benefits regarding the change in the tax structure. Indeed the cost of insurance is going to increase, and that will certainly affect the buyer’s budget while purchasing a health insurance plan. On the other hand, the induced competition has begun down-sliding the price of policies, which is seen as an olive branch by the prospective buyers.

Lastly, while purchasing any of those health insurance policies, one must ponder over his/her requirements and carefully match those with the provisions in the plan. Do not just focus on the premiums; check the policy tenure, claim settlement ratio and process, offered benefits, and other details that will shape the whole insurance plan in the long run. The GST on health insurance will be an aspect of such concern that you must address with due carefulness and research,  in order to ensure a policy that is within your budget and at par with your expectations.