Major Relief for Insurance Sector as ₹20,000 Crore DGGI GST Notices Nullified

As the country celebrated the seventh anniversary of the Goods & Services Tax (GST) on July 1, the insurance sector received significant relief as ₹20,000 crore worth of GST notices were nullified, ending a long-standing dispute with GST authorities. This resolution came after the 53rd GST Council meeting, which approved clarifications in favor of the insurance companies, as reported by CNBC-TV18.

Over 100 notices issued by the Directorate General of GST Intelligence (DGGI) to various insurance companies since November 2022 will now be rendered null and void. The GST Council recognized the industry’s concerns regarding co-insurance, re-insurance, wreck and salvage, and provided clarifications that resolved the issues.

The insurance sector had been facing demands for unpaid GST, particularly concerning co-insurance agreements, reinsurance commissions, and the reinsurance of crop schemes. The lack of clarity in GST law had led to substantial financial burdens on insurance companies, with demands exceeding ₹20,000 crore.

Insurance companies escalated the issue to North Block and the Insurance Regulatory and Development Authority of India (IRDAI), seeking urgent relief. The matter was analyzed by the law committee and fitment committee under the GST Council’s framework. Their recommendations were subsequently approved by the 53rd GST Council on June 22 in New Delhi. The government has now notified these clarifications.

What Was the Issue?

In co-insurance arrangements, the lead insurer issues the invoice to the customer and pays GST on the entire premium. This premium is then shared with co-insurers. However, GST authorities demanded GST on the portion of the premium shared with co-insurers, treating it as a service consideration.

Recently, the Bombay High Court issued notices in 22 writ petitions filed by major insurance companies challenging the GST levy on co-insurance policies. In response to industry representations, the GST Council recommended that the co-insurance premium apportioned to the co-insurer be declared as “no-supply,” and past cases be regularized on an “as is where is” basis.

For reinsurance commissions, where the commission is deducted from the reinsurance premium paid by the insurer to the reinsurer, GST authorities had demanded GST on the commission, viewing it as the insurer’s income. The GST Council recommended that this also be declared as “no-supply,” with past cases regularized similarly.

Regarding the reinsurance of crop schemes, initial insurance was exempt from GST, but reinsurance of such schemes was not exempt until January 2018. The 53rd GST Council recommended an exemption for the period from July 2017 to January 2018.

An expert noted that the recommendation to regularize past cases on an “as is where is” basis means the amendment will apply to existing cases, even if pending before courts. Dropping these substantial demands will lead to a more transparent structure for insurance businesses in India and enhance the ease of doing business for insurance players. While the detailed amendment is awaited, the process for refunding taxes already paid by insurance companies needs to be clarified.

These GST Council recommendations provide much-needed relief to the insurance sector, which has struggled with complex tax demands and legal battles. Declaring co-insurance premiums and reinsurance commissions as “no-supply” and exempting the reinsurance of crop schemes for a specific period demonstrate a pragmatic approach to industry concerns. By regularizing past cases, the GST Council alleviates financial strain on insurance companies and fosters a more conducive business environment. This move is expected to bolster industry confidence and pave the way for smoother operations within the sector. The insurance industry can now focus on growth and innovation, knowing that regulatory support aligns with their business practices. The Council is also expected to address the GST rate on health policy premiums, with industry bodies advocating for a reduction from the current 18% to 5%.

An advocate representing companies before DGGI expressed similar sentiments, stating that availing credit by any recipient of supply is based on statutory conditions. When insurance companies meet these conditions, availing credit becomes a statutory right. Disputed expenses as per insurance regulations do not affect the legitimacy of these credits under GST provisions.

The advocate also highlighted the importance of issuing notices within statutory timelines in cases where there is no fraud and the issue relates to industry practice. Notices issued beyond statutory timelines can be challenged. Additionally, the GST Council announced a waiver of interest and penalty when notices are issued under section 73. Therefore, transactions of procurement become revenue-neutral, and tax is never a burden.