GST & its Impact on Insurance
Polices..!
The Lok Sabha, on 8
August, 2016 passed the long overdue Constitution (122nd Amendment) Bill to
roll out the Goods and Services Tax (GST), with 443 lawmakers voting in favour
of the legislation, and AIADMK MPs staging a walkout after registering their
opposition.
The passage of the
bill marked a historic step towards tax reforms, said Prime Minister Narendra
Modi, adding that the GST was “crucial” to end tax terrorism and also to reduce
black money and corruption. According to Modi, the consumer will be the “king”
now, and he thanked all parties that supported the bill. Earlier, on 3 August,
2016 the GST bill was passed in Rajya Sabha.
The GST will replace
17 federal and state taxes with a single national sales tax structure. It’s
also expected to reduce business transaction costs. While the rate of GST is
yet to be finalised, rumours peg it at around 18%, in line with what has been
recommended by the concerned government panel.
But the common man is
more interested on the impact the bill is likely to have on various sectors of
the economy, and on their daily lives, regardless of what the government and
policymakers think.
While the “One Nation,
One Tax” scheme has become a reality, and there’s every reason to cheer,
services are likely to cost more once the GST is rolled out. As a result, if
you are one of those already paying a hefty premium for health, life or even
motor insurance policies, prepare yourself for some pain, once the new tax
structure is implemented.
Come April 2017, all
the three insurances are likely to cost more, as taxes are slated to rise a
maximum of 3%. One basis point equals a hundredth of a percent.
 |
| Mr. Naval Goel,PolicyX.com |
How much will you have to pay?
The moot question.
Period. Well, it actually depends on the type of insurance policies you have.
Not all polices attract the 15% service tax now. Besides, the method to
calculate service tax differs between policies.
Service tax, under a
unit-linked insurance plan (ULIP), is calculated on the premium component that
covers the risk.
But in case of an endowment plan, the 3.75% service tax is
levied flat on the premium amount.
Impact of GST on insurance premium
It will be evident
from the table given below that health insurance and term insurance policies
would be the two most affected categories once the GST becomes operational. The
service tax charged on the premium paid may climb to 18% from the present 15%.
|
Type of policy
|
After GST implementation
|
Current rate
|
|
Pure risk insurance/term insurance
|
18%
|
15%
|
|
ULIPs
|
18%
|
15%
|
|
Annuity: single premium
|
1.8%
|
1.5%
|
|
Motor insurance
|
18%
|
15%
|
|
Endowment policies (1st year)
|
4.5%
|
3.75%
|
|
Endowment policies (2nd year
onwards)
|
2.25%
|
1.88%
|
|
Health insurance
|
18%
|
15%
|
One may argue that
rise in service tax is largely proportionate across categories. So, why only
these two categories will be affected? The basic reason is that both health and
term insurances pay back only when something happens to the subscriber or the insured.
More specifically, under term insurance plans, the insurer is liable to pay
only when the insured passes away with the policy still operational.
The insurer’s
liability is zero if the insured person outlives the plan. The premium which
the subscriber has paid, is also not paid back, unless the policy has some
unique feature which permits it.
Likewise, under a
health insurance plan, no direct benefits are offered to the subscriber unless
he/she falls sick and is hospitalised. The insurer, of course, will add a no
claims bonus (NCB) to the cover, but to claim it, the subscriber is required to
have a medical condition. The inherent nature of both health and term insurance
plans make them price sensitive i.e. people usually buy schemes that cost less.
A greater incidence of
service tax is likely to trigger price wars between insurers because buyers
would now become even more price conscience. A similar eventuality holds good
for motor insurance too.
According to media
reports, the life insurance industry in India has been shrinking for some time
now. The growth rate fell to 2.6% in 2016 from 4.6% in 2009. Fears abound the
industry that the rates may further go southwards once the GST is implemented.
The Life Insurance
Council, the apex industry body of insurance companies, has already written to
the finance ministry, urging that GST be charged only on premium collected by
the insurer, for their life insurance services, without factoring in the
investment portion, where the companies act solely in the fiduciary capacity.
What should be your approach?
Ideally, premium
should not be the sole consideration when you purchase insurance policies.
Rather, you must inspect the insurance company’s claim settlement track record
and its after-sales service. Please never forget that the fundamental motive to
buy an insurance policy is to cover your risks.
Avoid getting carried
away by unbelievably low premiums. Many times, it’s prudent to ignore the costs
to a reasonable extent, if you manage to get the cover you are looking for. The
fact remains that subscribing to a term insurance is perhaps the most
economical ways to cover your risks.
Similarly, all
individuals should buy a health insurance, regardless of what surprise the
final GST rate throws up. Since the number of levies that are now part of the
premium you pay, would be subsumed into a single tax, it will considerably
lower the cost of compliance.
While the exact impact
can be ascertained only when the final rate is fixed, preliminary estimates
suggest a net 2% rise in the premium paid. So, if your premium payable is now
₹1,000, you may just have to pay ₹20-30 more.
With both Houses of
Parliament stamping its approval on the GST bill, it would now have to be
ratified in at least 16 of the 29 state assemblies. That seems to be a mere
formality as none except ADMK opposed its passage. And insurance policy
subscribers shall have to wait for the final rate to be declared by the GST
Council.
About the author
Naval Goel is CEO and Founder, PolicyX.com
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