Insurance executives knock on FinMin door for input tax credit fix

The insurance chiefs in a letter submitted to the finance ministry officials on Friday sought for implementation of the new GST rates on a prospective basis, while allowing for ITC on renewal premiums

Insurance companies’ chief executives sought some leeway from the Finance Ministry on Wednesday to make an allowance for input tax credits on individual health and life insurance policies, whose Goods and Services Tax (GST) levy has been slashed to zero by the GST Council, effective from September 22. 

The insurers’ parleys with the Finance Ministry highlighted that denial of input tax credit (ITC), for instance, on commissions paid to agents that are subject to 18 per cent GST, puts them in a difficult position to carry out the expected reduction in insurance premium rates. 

The insurance industry chiefs had also sent a missive to finance ministry officials last Friday, suggesting that the implementation of the new GST rates be done on a prospective basis, while allowing for ITC on renewal premiums paid on existing policies. They had also requested for inclusion of commission expenses in GST exemption, just as it had been done for reinsurance of individual policies, and refund of insurers’ unutilised ITC GST credits, sources aware of the development said. 

The industry has also flagged these issues in communiqués to the Insurance Regulatory and Development Authority of India (Irdai) and CBIC. The chief financial officers (CFOs) of insurance companies are also expected to meet Central Board of Indirect Taxes and Customs (CBIC) officials CBIC later this week, likely on September 12, to discuss removal of ITC.

 

ITC allows businesses to offset GST paid on inputs — such as reinsurance, commissions among others against tax liability. The insurers had already factored this while pricing and issuing the policy and withdrawal of ITC benefits is likely to impact the cost for insurers, and absorbing these costs would put pressure on their margins.

 

If the government does not refund unutilised ITC, it is likely to have a huge impact on their solvency margins, with industry sources pegging the industry’s GST ITC kitty at about ₹14,000 crore in FY24.

 

“The industry is seeking three things – new business is heavy on expenses and the way reinsurance has been exempted from GST, commissions must also be exempted because it is an expense. Similarly, we are pleading for a GST exemption on new business related commissions”, said an insurance chief aware of the relaxations sought by the industry.

 

“In the case of old books, which have been built over decades in the sector, we cannot change the price [of a policy]. So we are asking for a reprieve for them. We have already locked our prices over so many decades. Thirdly, we are requesting a refund on unutilised ITC credits accumulated in our GST ledgers over the years,” the person quoted above said.

 

“When the insurer entered the contract [for existing policies], we made some assumptions, some GST, some input tax credit, my cost and priced it accordingly. Suddenly, if the ITC is waived on the policy, the cost structure of the contract we entered in the past also changes,” said another life insurer.

 

“The insurance companies will have to take a hit and they will have to lower their cost as well as recalibrate distributor compensation. Although this is a good move in the long term, it will hurt margins and might affect the growth and insurance penetration agenda in the short term”, said an executive of a life insurance company.