Come July 1, and you will be paying more for insurance policies or while doing any banking transaction which attracts service tax. For, these products and services are going to cost more under the new indirect tax regime of Goods and Services Tax (GST). “The GST law subsumes excise duties, service tax, value added tax, entry tax, facilitating free flow of credit and thereby effectively eliminating cascading effects of tax that is prevalent today. However, in respect of ubiquitously used service sectors such as banking, insurance services, telecom services, the services are to cost dearer to the common man owing to escalation of GST on supply of services from the current rate of 15% to 18% and given that there is not substantial additional credit pool build up for such service providers. Thus, come July 1, 2017, one can see the prices of these day-to-day required services going up,” says Mahesh Jaising, Partner, Indirect Tax, BMR & Associates LLP.
Impact on Insurance
Under the GST regime, for instance, financial services including insurance products are kept under the GST tax bracket of 18%. This is an increase of 3% from the existing 15% service tax (including Krishi Kalyan and Swatch Bharat cess) on insurance premiums. “This increase of 3%, which will be implemented for both renewal as well as fresh insurance policies, will result in increased insurance premium to be borne out by customers. Customers will experience the same increase in taxes to be paid across financial services from 1st of July 2017. Even though in the medium to long term, GST will bring more efficiency into the system, which will bring benefits to end customers, in the short run customers will experience a rise in prices for amenities across the financial sector,” says Rajiv Kumar, MD & CEO, Universal Sompo General Insurance.
For example, suppose a customer opts for a comprehensive motor insurance policy for a private car whose annual insurance premium is around Rs 20,000 excluding taxes. Under the existing regime, the customer has to pay Rs 3000 as service tax at 15% rate which will increase to Rs 3600 under the GST regime from 1st July 2017. There will, thus, be an excess payout of Rs 600 from the customer’s wallet.
Similarly, with the implementation of GST, the tax on unit linked charges will be 18%. It implies that every Rs 100 collected as charges, which currently attract Rs 15 as service tax, will attract Rs 18 as GST under the new tax regime. The charges will get dearer by 3% or 300 basis points. Similar will be the case with term plans.
Banking services also attract 15% service tax currently, which will increase to 18% under the GST regime. Thus, like insurance, banking services will also become more expensive due to increase in the tax rate. Therefore, be ready to shell out more money as taking loans is going to get expensive. Also, whether you are going to withdraw money from the ATM machine or will be using your credit card, better watch out for the enhanced charges from July 1 onwards!