In the midst of discussions surrounding the rationalization of the Goods and Services Tax (GST), life insurance companies have opposed the potential exemption of term insurance policies from the levy. The insurance industry argues that removing GST would lead to the withdrawal of the input tax credit (ITC), which currently provides significant relief by offsetting the taxes paid on goods and services used in the industry. Insurers estimate that ITC accounts for approximately 11%, and they have urged the government to retain at least a 12% GST rate to avoid increasing costs.
The life insurance sector has emphasized that, without the full benefit of ITC, premiums would rise, making it harder for the government to achieve its goal of providing affordable life insurance products. They have also suggested that a reduction in GST rates should be accompanied by a corresponding reduction in the tax on insurance commission services.
One proposed solution is to implement a zero-rating approach, where GST is exempted on outputs, but insurers would still be able to claim credits for the taxes paid on inputs. This proposal aims to reduce the financial burden on insurers while maintaining the affordability of insurance for consumers.
Discussions on exempting term insurance and health insurance for certain groups, including seniors, have been delayed. The delay was partly due to the insurance regulator Irdai’s pending comments on the issue, which are expected soon. The finance ministry and Irdai are both involved in these discussions, as there is a strong emphasis on ensuring that the benefits of any tax reductions are passed on to consumers.
