How does GST impact your insurance premium?

Harjot Singh NarulaComparepolicy.comGoods and services tax (GST) is a revolutionary reform for the Indian economy’s indirect tax regime. Long pending GST Bill was finally passed in Lok Sabha on 8th of August 2016. After a long journey in which it faced  many challenges and confrontations, finally, the bill has reached the stage of implementation. GST will change the tax architecture between the state and the center.GST is a value added tax, which will eliminate the cascading effect or double taxation effect on the cost of goods and services down the value chain. GST will certainly impact the structure, incidence, computation of indirect taxes leading to a comprehensive restoration of the current tax regime in the country.With the new service tax rate, anticipated to be fixed at 18% under the GST spree, it is believed that the higher tax rate will have an adverse impact on the life insurance industry and the cost of insurance products at large. Life insurance penetration in the country has dropped from 4.6% in 2009 to 2.6% in 2016 showcasing a negative growth in the past few years. With the anticipated elevation in the service tax rate from 15% to 18%, the cost of buying insurance and keeping the policy active will increase marginally.The premium of an insurance policy basically depends on the type of an insurance policy, you are buying. Life insurance plans are broadly categorized as term plans, endowment plans, ULIPs and pension plans. Term plans purely offer death benefit and are termed as pure risk protection plans – the sum assured is paid to nominee- if the insured dies during the policy term. No maturity value is paid in term plans (apart from the term plans with return of premium (TROP) option). The premium component of a term plan comprises majorly of the risk element to provide insured a risk cover throughout the tenure of the policy.Endowment plans and ULIP’s offer both death and maturity benefit (whichever occurs first). Such plans have an element of both risk and investment in the premium component which makes it expensive as compared to a term plan.GST and its impact on insurance premiumPolicyholder typically pays service tax on the risk element of the premium component where as the investment element of the policies is usually out of the service tax scope. With the implementation of the GST, Insurance policies, including life, health and motor will all be costlier from April 2017 as taxes will go up by atleast 300 basis points (a basis point is one hundredth of a percentage point).Term PlansCurrently, service tax of 15% is imposed on the premium cost of the term plans. With the implementation of GST, the tax is expected to rise to 18% in the first year and also on renewal premium from April 2017. It implies that for every Rs 100 paid towards premium which currently attract Rs 15 as service tax will be replaced by additional Rs 18 as GST under the new tax regime. The premium will get dearer by 3% or 300 basis points.Endowment PlansEndowment plans or traditional insurance savings plan, which currently attracts a service tax of 3.75% on the premium in the first year of the policy is expected to 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. Health PlansCurrently, 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 be expensive as it will attract a tax of about 18% on premium from April 2017.Motor InsuranceMotor insurance premium also attracts 15% of the service tax which will enhance to 18%, if the rate is fixed up to this specified percentage mark. Ideal way out for the consumersIt is very important for an individual to secure his or her life, especially when the individual is the sole bread earner of the family. Life Insurance plans specifically term plans are the actual life insurance plans which cover you and financially compensates 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) too. Premium is not the sole and only determinant of depriving your family of the financial protection which they deserve in case of any unfortunate event like death, disability, or disease.Also, with the increase in insurance premiums, there will be a fierce competition among the insurers for offering the best insurance proposition to the consumer, which will apparently be 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.It is important to compare and buy the best insurance product which suits your family’s requirement, needs, structure, liabilities, objectives and budget.