SBI Life, HDFC Life shares erase gains despite 5% GST buzz; Emkay decodes

The confusion whether the likely 5 per cent GST rate on insurance premiums will make the policies cheaper or not has worried investors

GST cut on insurance: Insurance stocks, which saw a leg-up in the initial trading hours on Monday, ended off highs amid goods and services tax (GST) reform-led confusion.

 

As per the proposed reform, the current four-rate structure of the GST system will be converted into two-rate structure. Thus, goods and services will be taxed at either 5 per cent or 18 per cent rather than 5 per cent, 12 per cent, 18 per cent, and 28 per cent rates.

 

For insurance companies, which levy a GST of 18 per cent at present, a lower rate of 5 per cent has led to confusion around the availability of input tax credit (ITC).

 

Meanwhile, on the bourses, shares of SBI Life rose 4 per cent intraday but ended just 1.3 per cent higher on Monday. Similarly, HDFC Life shares advanced 3.3 per cent on the BSE in the intraday trade yesterday, but settled barely 0.3 per cent higher.

 

ICICI Prudential Life, too, erased its 4.7-per cent intraday gain partially to end 1.7 per cent higher. State-owned The New India Assurance Company, which rallied 8.8 per cent intraday on the BSE, ended 5.7 per cent higher on Monday.

 

By comparison, the BSE Sensex index, too, settled off highs at 81,274, higher by 676 points or 0.84 per cent.

 

On Tuesday, these stocks were trading up to 1.3 per cent lower as against a 0.3 per cent rise in the Sensex index. 

GST rate on insurance policies: What is the current rate and how is it charged?

Simply put, if an insurance company is receiving ₹100 as premium for Term Life, Motor OD, or Health policy, it collects an additional ₹18 (at 18 per cent GST rate) as tax from the customer.

 

If a claim arises, an insurance company has to pay GST on various services provided (example: Commissions and other non-salary operating expenses; labour cost in auto garage, in case of motor claims), and on goods insured (Auto parts, medical consumables, etc), explain analysts at Emkay Global Financial Services.

 

Hence in this process, insurers -- on a case-to-case basis – pay around ₹10-12 as GST on the goods and services used and adjusts this amount as input tax credit (ITC) from the ₹18 GST collected from the customer. The company, eventually, deposits the balance ₹6-8 with the government.

GST on insurance cut to 5%: What is the confusion?

Insurance companies are worried that a GST cut on insurance premium (from 18 per cent to 5 per cent), without lowering GST rates on any of the input goods and services, will create an inverted GST structure.

 

As explained by Emkay Global, if an insurance company has already paid ₹10 as the GST on inputs, then any tax income (on the insurance premium) lower than such collection would mean the insurer will need to adjust the base premium upward to recoup this excess GST paid.

 

For this, the company will pass on the additional cost to the customer. Thus, the customer will not pay ₹105 (100 as premium + 5 as GST), but ₹110.25 (105 as a higher premium amount + 5.25 as GST).

 

Further, if the ITC is not allowed, then insurance premiums for customers will rise to ₹115.5 (100 as premium + 10 for ITC + 5.5 GST). This is barely any change from ₹118 charged currently, Emkay said in its report.

 

GST 2.0: What can insurance companies do?

According to analysts at Emkay, each insurance company will have to charge GST and/or insurance premium based on its product mix and cost structure.

 

"A simplified analysis suggests that for multiline general insurers and SAHIs, the neutral GST rate (end GST collection being offset by ITC) is ~10-12 per cent as most service expenses and claims-related costs are under the purview of 18 per cent GST rates currently," it said.

 

In case of Life Insurance, GST on Term Life is 18 per cent; in case of traditional savings products, this 18 per cent rate is applicable on only a portion of premium, resulting in net GST rate incidence on the premium ranging at 1.8-4.5 per cent; for ULIPs, the 18 per cent GST is applicable only on ULIP charges.

 

Net-net, the 18-per cent GST ITC (on their commissions paid and other non-salary opex) nearly matches the GST collections on premium for life insurers, Emkay said.

 

"For Life Insurers, the current GST rates are Neutral with their given cost structure and the GST rates on those input goods and services. SBI Life could be an exception, as its costs are much lower than peers and hence the ITC benefit it takes would be lower," the brokerage pointed out.

 

In this backdrop, Emkay Global suggests the sustainable path to lowering the cost to the end consumer and easing the compliance burden on insurance companies would be to bring down GST on premiums with ITC as well as lower GST rates on input services and goods, to align with the end GST rate.