Goods and Service Tax (GST) will change the tax architecture between the state and the Centre. It is unifying all the current indirect taxes under the Dual Tax structure of GST. It is a ground breaking reform for the Indian economy's indirect tax regime.
With implementation of GST, cascading tax effect or double taxation on sale of goods and services will be eliminated. It will certainly impact the structure, incidence, computation of indirect taxes leading to comprehensive restoration of the current tax regime in India.
All industries, including the Insurance Industry, will be affected with the implementation of GST. Not only insurance industry, but also policy holders will be affected with GST implementation.
As per the rates declared by GST council, insurance sector will have 18 per cent as GST rate. Various insurance company officials said the rate hike would be immediately passed on to customers, hence the customers would be the one to pay additional tax.
This would mean, direct impact on the premium being paid by the policy holders.
During discussion, GST council had difference in opinion for GST rates whether it should be 12% or 18%. But then finally it was decided to have a unified GST rate of 18% across financial sectors.
The premium paid by policy holder is based on the type of policy they buy. Insurance Policy are broadly categorised as Term plan, Endowment Plan, ULIP, Health Insurance Plan, Motor insurance
Term plans purely offer death benefit and are termed as pure risk protection plans. In such plans sum assured is paid to the nominee, if insured dies during the term of the policy.
The premium component of a term plan comprises the majority of the risk element to provide insured a risk cover throughout the tenure of the policy. At present, service tax of 15 % is imposed on the premium cost of the term plans. As per rates declared GST rates will be 18%. This means the premium will get costlier by 3 % or 300 basis points.
Endowment plans or traditional insurance savings plans offer both death and maturity benefits, whichever occur first. Currently, endowment plans attract a service tax of 3.75 % on the premium in the first year of the policy and will rise to 4.5 % in the first year under the new tax regime. As of now, 1.88 % of the service tax is levied on endowment plan's premium for the second year, which is expected to rise to 2.25 % from the second year onwards after the implementation of GST.
Unit Linked Insurance Plans (ULIPs) also offer dual benefit of insurance and investment. At present, service tax of 3.5 % is levied on protection part of ULIPs in the first year and 1.75 % from second year onwards. This would go up to 4.5 % in the first year and 2.25 % from second year onwards.
Health Insurance Plan
In current tax regime, health plan premium attracts a service tax of 15 % on its premium cost. With the introduction and implementation of the GST, the cost of purchasing the health insurance will become expensive as it will attract a tax of about 18 % on premium from July 2017.
Motor insurance premium also attracts the service tax of 15 %, which will rise to 18 % from July 2017, if the rate is fixed up to this specified percentage mark.
Impact on Practice of Buying Insurance
But here the question arises that hike in tax should impact your decision of buying insurance or not. It is true that GST will make buying insurance little expensive, but it is very important for an individual to secure his life, especially when the individual is the sole bread-earner of the family. Life insurance plans, specifically term insurance plans, are the real life insurance plans which cover you and financially compensate your family in your absence.
It is important to look at the type of insurance plan holistically, which includes its benefits, inclusions, policy coverage, exclusions, policy term and its cost (premium).
Severe Competition Among Insurers
Also, with the increase in insurance premiums, there will be a severe competition among the insurers for offering the best insurance proposition to the consumer, which will be apparently beneficial for the consumer. Insurance premium, apart from including risk element, also includes expenses related to policy issuance, intermediary commission, etc, which could be lowered by the insurers to compensate the effect of enhancement of service tax in the new GST era.