Lower GST to Address Slowdown in Life Insurance Sales: Insurers Appeal to GST Council

As the Union Government prepares to assume office following the ongoing general elections, a significant agenda item is emerging: a request from insurance companies for a phased reduction in GST rates. These companies have approached the GST Council, advocating for lower levies starting with life insurance and followed by health insurance.

Sources reveal that insurers have submitted a comprehensive representation, urging a reduction in GST rates on life insurance products from the current 18% to 12%. They argue that the high GST rates are deterring people from purchasing life insurance, pushing them towards alternative options. This trend, they contend, undermines the government’s goal of fostering an inclusive, insured society by making premiums and products increasingly expensive.

Additionally, insurers are seeking a similar reduction in GST rates on health insurance from 18% to 12%, subsequent to the life insurance rate cut.

Moreover, the insurers have requested clarity from the GST Council regarding the application of GST to co-insurance. They suggest eliminating GST on outsourcing or sharing the insurance burden between companies through sub-contracting.

“Insurance companies have urgently sought government intervention, and it is anticipated that the new government, once in office, will bring this representation to the GST Council for detailed consideration,” sources indicated.

Should these proposals be entertained, they will need approval from the GST Council-nominated law committee, fitment committee, and officers before the council can formally address them.

In the meantime, CNBC TV-18 has reached out to the Finance Ministry for a response to the insurance sector’s proposals and is awaiting feedback.

Experts assert that reducing GST rates would align with the government’s objective of ensuring comprehensive life and health insurance coverage for every individual, thereby promoting a more secure future. Concerning the co-insurance/reinsurance issue, sources clarify that it is a standard industry practice for insurance companies to cede a portion of risk to reinsurance companies for a fee known as the ceding premium. The reinsurance companies, after evaluating the assumed risk, provide a discount to the insurance company on the ceding premium, known as a reinsurance commission.

The need for clarity arose following recent investigations by the Directorate General of GST Intelligence (DGGI), which raised concerns with general insurance companies. The DGGI argued that the reinsurance commission constitutes a consideration subject to GST, a view that insurance companies dispute, noting that these commissions were not subject to service tax under the previous regime.

In the context of co-insurance, multiple insurance companies collaboratively underwrite a common risk. Typically, one insurer acts as the lead, managing administrative activities and issuing invoices to collect the full premium. DGGI investigations have asserted that sharing premiums between the lead and other insurers amounts to a supply subject to tax, a stance that differs from the previous service tax regime. Moreover, sources note that even if tax is paid by one entity, the other can claim credit, rendering the transaction revenue-neutral.

An advocate who has previously filed writs on rate disparities remarked that reducing the GST rate from 18% to 12% might not be a practical solution. Instead, a rationalization of the 12% and 18% rate structures would likely be on the GST Council’s agenda in its next meeting.

“For long-term insurance policies that transitioned from the pre-GST to the GST regime, there has been no reduction in premiums charged by insurance companies,” he added. He also emphasized that insurance companies should assess the benefits that ought to have been passed on to customers and consider whether anti-profiteering provisions might apply in such cases.