How GST will boost the insurance sector’s fortunes

The new nationwide goods and services tax (GST) to be rolled out from July 1 will create one of the world’s biggest single markets. This makes GST, the biggest indirect tax reform since independence, stand out as a big driver towards formalization and transparency. For the multi-billion dollar Indian insurance industry, GST is expected to boost economic activities in the medium to longer term. As the well-being of the insurance sector is directly proportional to economic activities, it’s but imperative that the insurance industry will also see significant growth. Such positive effects should ultimately help increase the penetration of insurance in India, where per capita premium underwritten is among the lowest globally.

Ease of business will improve as layers of taxation reduce and business policies are decided based on fundamentals, instead of taxation structure. The government has ensured that GST rates are not extremely different from the existing incidence of taxation, potentially offsetting the fear of inflation. Given the massive planning and implementation required for GST, so far it’s been very well-executed.

Step in right direction

The advent of GST will mean both insurance companies and their customers will play a big role in nation-building. At present, the tax rate applicable for insurance is at 15% comprising 14% Service Tax, 0.5% Swachch Bharat Cess and 0.5% Krishi Kalyan Cess. This is a centralized tax, and some credit is taken by insurance companies as they offset tax paid by policyholders, and by themselves as input credit. With GST now harmonizing this at all the levels of value add taxes existing across states, there will be only one taxation rate applicable for the insurance industry which is at 18%.

Long-term benefits

It would be wrong to measure the impact of GST by just the higher immediate cost of general insurance such as car, health and other non-life policies. Taxes will also increase for life insurance products like term, endowment and unlit-linked. The real effects of GST on the industry will be far-reaching and positive. It will replace indirect tax levies and lower compliance costs, and create a common market. The country’s changeover to the goods GST could potentially enhance the country’s gross domestic product (GDP) by 1-2%, or even higher, in the next 3-5 years. From the inflation point of view, GST over the medium term, could bring down price-rise more permanently.

Simple but big reform

For customers considering buying an insurance policy, nothing changes in the selection process as the GST impact will be same across insurers. The good news is some of the higher insurance cost should be offset if tax on services availed by the industry are allowed to be taken into account to reduce insurers’ tax paid. Once the state/centre structure of GST becomes simplified, this will aid in lowering administrative costs for insurers. This will ensure insurance industry will be able to pass on the benefits of this big-bang reform to end-customers soon.

Sensitive to the needy

It is important to acknowledge the government’s vision with GST. While it has tried to boost tax compliance, the government has shielded the most vulnerable sections of the Indian society from shouldering any extra burden. This has been done by exempting services general insurance business provide under Hut Insurance Scheme, Cattle Insurance under Swarnjaynti Gram Swarozgar Yojna, Weather Based Crop Insurance or the Modified Agricultural Insurance Scheme etc. In the life insurance segment, services provided under Janashree Bima Yojana, Aam Aadmi Bima Yojana, Varishtha Pension Bima Yojana, Pradhan Mantri Jeevan JyotiBima Yojana, and Pradhan Mantri Vaya Vandan Yojana etc. have also been exempted.

Conclusion: Global experience has shown that an agile and lean financial services industry is the backbone of any fast growing economy. By emerging as an effective method of tax collection, GST is sure to help build a stronger Indian insurance industry and aid in protecting Indians better.