Input tax credit removal blunts impact of GST waiver on insurance

While the GST exemption on health and life insurance premiums will lower costs for consumers, insurers will absorb some impact due to the removal of input tax credit (ITC)

With the goods and services tax (GST) on individual health and life insurance premiums now fully exempted — down from 18 per cent earlier with input tax credit (ITC) — policyholders are expected to benefit from lower premiums. However, insurers are unlikely to pass on the entire benefit, as the withdrawal of ITC will increase costs, weighing down on margins. 

The GST Council on Wednesday exempted GST on all individual life insurance policies — including term life, unit-linked (Ulip), and endowment policies, as well as reinsurance — in a move aimed at making insurance more affordable and expanding coverage across the country. 

Similarly, all individual health insurance policies (including family floater and senior citizen plans) and their reinsurance have been exempted to widen insurance penetration. 

Suresh Ganapathy, managing director (MD) and head of financial services research at Macquarie Capital, said reducing GST to zero could turn negative if ITC benefits are not restored. “Acquisition costs are high for health insurance policies. In both health and life insurance, companies will have to decide how much of the hit they can absorb and how much to pass on to distribution partners and customers,” he said. 

“We think insurers will not raise base prices but will absorb the impact. Thus, insurance companies will have to take some hit on margins and embedded value in the near term. A price cut, if it stimulates demand, is good in the longer term. If consumer affordability improves and growth picks up, it will ultimately benefit the industry and drive penetration,” Ganapathy added. 

A private sector insurance chief executive officer (CEO) said the GST cut had created an inverted rate structure, as ITC is no longer available. “This has increased costs for insurers, forcing them to adopt loss-reduction strategies. While customers will see some premium reduction, they will not get the full benefit, as companies will need to raise prices to offset the lost ITC. Renewal premiums and health insurance will also reflect this impact. The burden will need to be shared across the ecosystem, including distributors,” the CEO said. 

The new GST exemption will apply to premiums from September 22 onwards.

 

“According to the current understanding, GST on insurance premiums will be applied based on whichever comes first — the date of premium payment or the policy issue date. For renewals falling before September 22, the current GST rate will apply if the premium is paid before that date. However, for policies renewing after September 22, or where the premium is paid after September 22, the revised GST rate will be applicable,” said Animesh Das, MD and CEO, Acko General Insurance.

 

Insurers remain hopeful that greater affordability will drive higher demand over time, helping normalise costs. But in the near term, profitability is expected to be squeezed.

 

“There will be an impact on the company’s profit and loss, and consequently on margins, as many expenses will rise without the ability to offset them through ITC. Passing on the entire benefit to consumers will be very difficult,” said the CEO of a private insurer, adding that immediate benefits must be provided to customers without altering product structures, further straining companies.

 

“If we want to retain margins, we will have to reprice products, which will take some time,” the CEO said, adding that traditional product-heavy insurers will be hit harder than those focused on Ulips.

 

Meanwhile, insurers, through the Life Insurance Council and General Insurance Council, are expected to appeal to the government seeking ITC restoration. The industry is also awaiting clarity on whether the exemption applies to renewals, fund management charges, and related areas.

 

Even so, the industry has hailed the move as “historic”.

 

“The initiative of removing GST on individual life insurance products is a step towards making life insurance more affordable for all citizens, in line with the objective of ‘Insurance for All by 2047’,” said R Doraiswamy, MD and CEO, Life Insurance Corporation of India. 

The fine print 

*  Move to raise insurers’ costs in short to medium term

  *  18% GST rate to apply for renewals due before Sep 22