The Goods and Services Tax (GST) was slated to influence the prices of almost all the consumer products and services offered. GST was claimed to be the greatest indirect tax reform in India since independence. It was expected to have a positive impact on the Indian economy.

The service sector, at present, comprises 60% of the Gross Domestic Product (GDP). Taking this into consideration, the GST was likely to have a huge impact on the service sector. The life insurance industry also forms a part of the service sector, which, consequently, got greatly affected by the GST.

Life insurance is a sector which has a vast potential in the country due to the fiscal cushion that it offers to the people for taking care of their needs and requirements at various stages of life. Nevertheless, life insurance, at present, sees a very low penetration in the country. Taking this into consideration, it could be advantageous to not only create awareness but also boost its coverage and reach.

Life insurance services were taxed between the range of 1.5% and 15% before the implementation of GST. The rate of service tax that was applicable then was decided based on the type of the policy. In December 2015, Revenue Neutral Rate (RNR) report was published by the Chief Economic. This report was on GST Laws, according to which, a standard GST rate of 18% was decided for the insurance services.

The burden of indirect taxes was passed on to the end customer; the augmented 18% tax rate under the GST was likely to make life insurance policies more unreachable to a larger chunk of customers, which in turn, lowered the level of insurance penetration in India. Despite this, now the insurance penetration has witnessed a growth of 8% (CAGR) approximately.

In comparison to countries like Australia, Malaysia, Africa, Singapore, etc. where the government provides the life insurance benefit as a part of social security, imposing taxes on the insurance products and services deters many people from considering buying life cover for themselves and their dependents.

The Relationship between the Life Insurance Business and GST:

The premiums of life insurance policy represent two most important components, namely, risk coverage and savings. The service tax was imposed only on the premium component.

As per the rules of GST, the value of services on which the GST is imposed regarding life insurance industry shall be according to the following:

• The gross premium is reduced by the allocated amount for savings or investments on behalf of the policyholder.
• When single premium annual policies are taken into consideration, the insured will be charged 10% of the single premium.
• In other cases, 25% of the premiums for the first year of the policy and 12.5% of the premiums in the forthcoming years will be imposed. For instance, if the premium of an endowment plan is Rs. 100, then the 18% GST would be imposed on the 25% of the premiums (which will be Rs. 25) the GST will be Rs. 4.50.
• If the total premiums paid by the insured are towards the risk cover of life insurance, only 18% GST would be imposed on total premium.

Due to the increase in the percentage of GST, the overall impact of GST is the increased expenditure (premium + increased GST), when it comes to endowment plans and term life insurance.

The insured stands a chance to avail the benefits if the insurance companies get a green signal on the input tax credit benefit. Before the implementation of GST, it was unclear, since the centre/state GST structure was very complex. However, after the implementation of GST, the new and existing insurance customers had to bear the updated price.

GST Rate: Before and After: