Double whammy for insurance policyholders

Service tax introduced on insurance premiums last year will be hiked to 14%; GST implementation will lead to steeper hikes in premium

It is a double whammy for insurance policyholders. Last year, service tax was made applicable on insurance premiums; in the budget presented on Saturday, Finance Minister Arun Jaitley raised the rate of service tax from 12.36 per cent to 14 per cent. With this, premiums are set to go up and policyholders who paid more last year will have to pay even more this year.

This will not only impact the middle-class and upper-class customers, but also those enrolled in specific health care schemes.

Anuj Gulati, managing director and CEO, Religare Health Insurance, said: “The marginal increase in service tax to 14 per cent will certainly impact the consumer, with a larger impact being experienced by low-income consumers of healthcare schemes wherein there has been a long-standing industry request of removing the service tax levy.”

Besides, the goods and services tax (GST) to be implemented from April 1, 2016, will further increase the premiums. Apart from service tax, insurance premiums are dependent on mortality tables dealing with life expectancy and past claims. While insurance premiums came under service tax purview from January 1, 2014, insurers passed the burden on to customers in a gradual manner.

Insurance experts are of the view that the business will be impacted even in the next financial year with GST being implemented, which proposes a higher rate of service tax.

Ajit Banerjee, chief investment officer at Bharti AXA General Insurance, said the increase in service tax would result in a rise of premiums paid by policyholders. He added this might further increase to 16 per cent from April 2016 to facilitate transition to GST.

The head of the actuarial department at a mid-size life insurer said it would file the revised premiums of products from the next financial year, keeping in view the service tax hike.

Insurance premiums had come under the service tax ambit from 2014 when the government had made changes to the Finance Bill. After this, the service tax impositions were passed on to customers in the form of increased premiums.

Rajesh Sud, chief executive officer (CEO) and managing director, Max Life Insurance, said the increase in service tax could be a deterrent to the insurance sector. Life insurance premiums have been on a decline in the current financial year with an 8.7 per cent drop in new premiums.

However, it is still not clear whether there will be a gradual premium hike as well as what impact there will be on renewal premiums. Insurers expect some short-term impact on persistency (the number of policies that are active after the first year) due to the premium increase.

Earlier, the United Progressive Alliance government had widened the base of service tax to include insurance policy premiums paid by life insurance policy holders.

Here, the service tax rate on traditional life insurance products was set at 3.09 per cent. For term-plans and unit-linked insurance policies, it was set at 12.36 per cent.

The Insurance Regulatory and Development Authority of India had also said service tax would be applicable to services provided by it in grant of registration and licences. The regulator had begun to collect service tax from its service receivers — insurance companies, third-party administrators, brokers, agents, insurance repositories, web aggregators, and referral entities and surveyors from January 1, 2014.

Experts have made representations to the finance ministry and regulatory bodies not to include insurance premiums in service tax. However, their demand was not considered.