Impact of GST on Insurance

We have all heard about GST, i.e. Goods and Services Tax. Here is a little background on this tax to help you understand it better. GST was first announced in the Parliament in the year 2006 with the primary objective to simplify and unify the indirect tax regime in the country. It is a value added tax that abolishes the cascading effect of the intermittent taxes on the price of goods and services. With a uniform and single tax structure, the bill will replace as many as 17 federal and state taxes.

How will GST work?

The new tax structure of GST will come into effect from April, 2017. Once this happens, all the state and central taxes that are levied on goods and services such as excise duty, VAT, service tax, luxury tax, entertainment tax, etc. will be incorporated within a single tax comprising two components, i.e. state GST and central GST. Each of these taxes will be divided uniformly to form the GST rate. The anticipated rate of GST is likely to be 18 %. In the present non GST rule, indirect taxes on goods vary between 27 to 32% whereas those on services stand at 15 %.

How will it affect goods and services?

Post GST implementation, the cost of goods is likely to decrease and the cost of services is likely to increase. However, the overall pressure of taxes on consumers will reduce significantly. Purchase of small cars, two wheelers, movie tickets, groceries, and consumer electronics are likely to become cheaper for the buyers whereas mobile phones, air tickets, and insurance premiums will witness price appreciation. Few exceptions to the GST bill include alcohol, electricity, tobacco, and petroleum products.

Impact on the Insurance Sector

While GST bill will influence all sectors across the economy, let’s take a look at the kind of impact it will have on the insurance sector:

At present, the standard rate of service tax is 15 per cent which comprises:

  • Basic Service Tax: 14 per cent
  • Swachh Bharat Cess:5 per cent
  • Krishi Kalyan Cess:50 per cent

With the implementation of the GST, the service tax will also become the part of GST. This will affect the premium rates of the insurance policies as they are largely affected by the service tax rate. Therefore, both life and general insurance policies will have tax levied as per GST at 18%.

Speaking of insurance, buying health insurance holds great significance in securing an individual’s well-being. Besides offering protection in times of medical emergencies, a health insurance cover provides mental peace to the insured. Amidst the rising costs of healthcare, the growing demand of Health Insurance Policies is evident. Moreover, health in today’s time serves as a paramount asset for any person in comparison to any other form of wealth. Therefore, most of the insurance providers are offering a variety of health insurance plans in order to suit the needs of every individual. The inevitable requirement of health insurance is certainly not going to cease. At present, the service tax charged on health insurance premium is 15 per cent. With the implementation of GST, the Tax on premium will grow to approximately 18 per cent, making the overall cost of health insurance policies expensive.

The other popular insurance is Motor Insurance which is mandatory as per the Motor Vehicles Act of India whether one has a bike, a car, or any other vehicle. The need for means of commute is everlasting and owning the right type of motor insurance is prudent not just in terms of protection of the insured but also for the safety of the third party. Besides that, the financial cover offered by any type of motor insurance is one of the main benefits for the insured. Whether you are buying car insurance or two wheeler insurance, service tax charged on premium is same as that on health insurance, i.e. 15 per cent. With the implementation of GST, the tax will appreciate to 18 per cent. This would certainly reflect an increase in the cost of Motor Insurance Policies as well.

Be it health insurance policy or motor insurance policy, both these policies have a recurring impact on the insured owing to their renewal time period. Most of the people need to renew their policies after a year or two. With respect to the impact of GST on renewability of insurance policies, the insured will have to pay an increased amount of premium. However, in case of those who own policies for a long period of time will remain unaffected from the impact of GST. For example, there are customers who opt for a two wheeler insurance policy with a term period of 3 years and in particular for those whose policy does not end this year will not have to pay additional taxes. Therefore, the current implementation of GST is not going to affect them.

How is GST beneficial for Insurance Buyers

Although GST will increase the overall price of the policy, be it life or general insurance, it will create a tight competition among insurance players. In order to attract buyers, insurers are likely to lower the prices such as by cutting down on expenses related to policy issue, and similar other factors that add to the cost of policy. Moreover, they will enhance the level of service with respect to purchase of insurance products or filing of claims. So this is definitely good news for buyers, who often neglect the other factors and restrict their criteria to just pricing while buying insurance plans. What is important to be understood by the consumers is that premium is not the only factor based on which one should purchase any kind of policy. The essential aspect of any type of insurance, be it motor insurance or health insurance, is the protection that it offers to your loved ones against unprecedented events and the varied services that the insurer provides in terms of policy tenure and claims.

So with GST, insurers may make their products better by enhancing the quality of services and enhance the customer buying experience.

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