Defending the GST Council’s move to bring down the tax on life and health insurance to ‘nil’ from the existing rate of 18%, Finance Minister Nirmala Sitharaman said that insurance companies have other products also in their portfolios on which they can avail input tax credit (ITC).
Ever since the GST Council, in its 56th meeting chaired by FM Sitharaman last week, cut the GST rate to zero, concerns have been raised by experts and the industry that the insurance sector would not be able to avail ITC. The GST Council’s decision on rates will be effective from 22nd September.
Expenses on which insurers claim GST
Insurance companies until now are claiming ITC on operational expenses such as rent, distribution commissions, IT-related services and administrative expenses and they offset the tax against the tax collected from customers on insurance premiums. But now they won’t be able to offset the tax paid on those expenses as there won’t be any GST to be paid on premiums by customers.
In an exclusive interview with The Financial Express, Sitharaman said that there are still many insurance portfolios, which are left for them to take the input tax credit. “We have brought the tax down on the sector after paying heed to people’s voices,” the minister said defending the government’s decision to lower the GST rates on most goods and services, including life and health insurance.
Experts’ views on likely impact on insurers
Experts are of the view that in the absence of ITC, input costs are set to go up and companies will have no choice but to pass it on to customers. This as a result will increase the price of insurance premiums. So, according to them, the GST cut will adversely affect health and life insurers. They also said that the move would especially impact more standalone health insurers like Star Health and Niva Bupa which have only one line of business. On the other hand, multi-line insurers can still have some relief as they have other portfolios also on which they can avail ITC.
Kotak Institutional Equities Research recently released a report suggesting that insurance companies may consider revising their tariffs by up to 5% to offset losses resulting from the absence of input tax credit.
“A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5%,” says the report. This will help the companies compensate for the loss of input tax credit that is currently availed of, it added.
Star Health, Niva Bupa and Care Health may need to raise tariffs by 1–4% to offset the impact of the GST exemption, the brokerage said.
The report estimated that Star Health paid GST of over Rs 3,000 crore in FY25, assuming an 18% rate on all policies sold in the previous year, and availed ITC of Rs 395 crore. “The ITC benefit on items other than reinsurance, proportionate to the retail business, is now lost. To be margin-neutral, the company will need to raise tariffs by about ~1–3%,” the Kotak report said.
The brokerage, however, said that despite a possible price hike, policyholders may till benefit from a 12–15% reduction in prices, which could support demand for the sector.