Life insurers firms plan to approach regulator for relief after ITC removal

This comes after the industry passed the entire benefit of lower GST rates to policyholders to increase affordability

Life insurance companies are planning to approach the insurance regulator to seek approval for passing on a portion of the financial impact of the removal of input tax credit (ITC) to distributors in the form of reduced commissions, according to multiple sources familiar with the development.

 

This follows the introduction of a nil goods and services tax (GST) on individual life and health insurance premiums.

 

The companies, through the Life Insurance Council — an industry body representing the firms— will send a letter to the Insurance Regulatory and Development Authority of India (Irdai) this week, highlighting their concerns and suggesting that the partial impact of the removal of ITC be passed on to the distributors, sources said.

 

This comes after the industry passed on the entire benefit of lower GST rates to policyholders to increase affordability.

 

The life insurance industry has estimated that the removal of ITC will have an impact of around ₹15,000 crore, out of which, they want to pass on ₹7,500-₹8,000 crore in the form of lower commissions to the distributors, the sources quoted above said.

 

Experts said this will ease the impact on insurance companies and help protect their margins to some extent.

 

“The industry estimates the impact to be around ₹15,000 crore. Through the council, we will approach the regulator to pass on some of this impact to distributors. Most insurance companies are on board for this plan. However, certain companies remain non-committal. The letter to Irdai is expected to be sent by Monday or Tuesday,” said the CEO of a private sector life insurance company.

 

“Life Insurance Council is having discussions to bring down commission to accommodate the GST impact and is likely to propose the same to Irdai. Out of the ₹15,000 crore estimated impact of ITC, nearly ₹7,500 – ₹8,000 crore is related to the commission which the industry is planning to pass on to distributors in order to effectively pass the benefit of GST revision to customers. Industry is suggesting to reduce distributor payouts to nil GST rates from October 1. However, it is going to be difficult to have it because every company and distributor has different rate structures,” an industry source said.

 

Earlier this month, the GST Council announced a complete exemption from GST for all individual life insurance policies — including term, unit-linked, and endowment policies — as well as their reinsurance. The move aims to make insurance more affordable and widen coverage across the country. Similarly, all individual health insurance policies — including family floater and senior citizen plans — and their reinsurance have also been exempted to boost penetration.

 

Following this, the insurance industry had sought some leeway from the finance ministry on input tax credits for individual health and life insurance. They argued that denial of ITC on commissions paid to agents — which attract 18 per cent GST — makes it difficult to deliver the expected reduction in premiums. However, the Centre clarified that while reinsurance services would be exempt, ITC on other inputs or services will not be available for individual health and life insurance products, since these have been exempted from GST.

 

While there was initial confusion in the industry about how much of the benefit from the removal of GST could be passed on to policyholders—since the removal of ITC would affect costs—starting September 22, the insurance industry passed on the entire benefit of the nil GST to policyholders.