Brief about GST in India
Goods and Service Tax, commonly known as GST was introduced in India with effect from 1st July 2017. It is believed to be one of the biggest indirect tax reforms, in recent times, subsuming almost all indirect taxes at the State and Central levels. The country will follow a unified, destination-based tax structure thus replacing indirect taxes such as VAT, excise duty, CST, service tax, entertainment tax, luxury tax, among others. GST is a value-added tax that will do away with the problem of cascading effect from the price of goods and services down the value chain.
GST framework and its benefits.
GST shall be levied on both goods & services. India has adopted a dual GST model, which means that Centre and States simultaneously levy GST on taxable goods or services or both, which takes place within a State or Union territory. These goods and services shall be categorized into different tax slabs of 5%, 12%, 18%, and 28%. In case of sales within the state, Central GST (or CGST) and State GST (or SGST) shall be levied and in case of inter-state sales, Integrated GST (or IGST). As explained above, since GST will eliminate the cascading effect, it will result in reducing the overall prices of products that were costly earlier.
GST and Insurance Sector
GST has no doubt impacted on every sector in the Indian economy. Before GST was implemented, Service Tax was charged on the insurance premiums. The rate of service tax charged was 15% (Basic service tax – 14% + Swachch Bharat Cess – 0.5% and Krishi Kalyan cess – 0.5%). Post GST implementation, service tax was replaced with GST. The GST rate on Insurance premium for the insurance sector has been set at 18% which is on the higher side as compared to Service Tax. Thus, whether one plans to buy a new insurance policy or renew an existing policy, post-GST the cost of these services has an overall increase of 3%.
General insurance policies include health insurance, motor insurance, travel insurance, fire insurance, marine insurance, etc.
Thus, to summarize, the GST rate on insurance premiums for general insurance products has been set at 18%.
Corporate policyholders, who have taken general insurance policies, can claim input tax credit towards the GST paid for their policies.
Impact of GST on Insurance Buyers?
For an individual, purchasing an insurance policy forms an important part of any financial decision. The factors based on which insurance policy is chosen varies from individual to individual. For instance, if one owns a vehicle, be it a two-wheeler or four-wheeler, motor insurance is mandatory as per the Motor Vehicles Act. Similarly, health insurance policies are a better option to prepare for financial assistance in case of a medical emergency and to mitigate the ever-increasing medical costs. The advantages of health insurance coverage compensate for the increase in the cost of services.
It is evident that in comparison to the service tax rates, there is an inconsequent increase in GST rates towards the insurance premiums paid by policyholders that may result in an overall increase in the price of general insurance policies. To continue to attract buyers, insurance companies will attempt to make policies cheaper by cutting down their expenses related to these policies. Policies will be made more attractive since insurance companies will be willing to offer additional benefits in a similar price range. Also, for insurance buyers, it will not be wise to base their policy buying decision merely on premium pricing. More important factors to be kept in mind while choosing insurance policies will be to understand their individual needs, policy features, cashless options, maternity cover, pre-existing illness cover, critical illness cover, add-on benefits, policy riders, the period of the policy, inclusions, and exclusions, etc.