As India enters the new tax regime from July 1, 2017, businesses and consumers are highly impacted. It is expected that GST will declutter the multi layer tax structure and bring in transparency to the system. It will end tax evasion and bring individuals under the tax regime. GST will unify 10 indirect taxes into one tax which means there will be an end to the compounding effect of goods and services. There are various speculations about the impact of GST on different industries. The impact on insurance industry has been discussed here:
The Indian insurance industry will have to go through a temporary brunt because the implementation of GST will impact insurers and individual policyholders. A policyholder pays a service tax on the amount of risk element involved in the premium component, and the investment remains out of the service tax scope. After the implementation of the GST, the life insurance policies will become dearer by 3%. In addition, the amount of service tax will vary depending on the risk element in the premium component and the tax will be levied only on the risk portion of the premium and not the saving portion. Hence, the immediate impact of GST will be higher for term insurance and endowment plans. For general insurance policies, the cost of purchasing a policy will increase due to the 3% increase in service tax, which is 15% to 18%.
With the implementation of GST, the health and auto insurance policies will attract a tax of 18% on premiums, which makes these policies also expensive. For example, if an individual was paying a premium of Rs.10000 including Rs.1500 service tax, he will now have to pay a total of Rs.10300 with Rs.1800 as service tax. Moreover, the credit of input tax is not allowed for the health and life insurance sectors.
For insurance policies sold online, the norms mention that the companies should go for TCS at 1% of the taxable value of premium for all the new and renewal businesses. The insurance companies also need to make amendments about the renewed transaction handling, operational and information systems and registration compliance because GST demands a restructuring of these components. GST is a destination based tax, hence insurance companies will be required to obtain registration for all the states they cater to and they will also have to bifurcate their services and invoice the customers based on their location of consumption.
GST will need a complete restructuring in the accounting, administration and IT mechanism to ensure that the records are well maintained. This will require an upgrade in the IT systems and training for the employees. The records of all the policyholders need to be maintained efficiently so as to keep in mind the location of the service recipients for the records of the supplier. In order to avail the input tax credit, insurance companies will have to organize the vendors and include their identifications to claim the input credits.
Although there is a nominal increase in the tax rates, the increase in the total outflow could be noticeable. For an individual paying premiums for various covers, the total outflow will be high with no additional coverage or benefits. This increase in premium could impact the demand for the insurance products.