The GST Council has completely removed the 18% GST on life and health insurance policies. This news has come as a big relief for crores of policyholders who pay a huge amount as premiums every year. The biggest question after the removal of GST is how much the policy premium will be reduced. Will customers get the full benefit of 18%? Let’s understand the whole math behind this big change.
New challenge for insurance companies
After the removal of GST, insurance companies will not be able to take advantage of input tax credit (ITC). ITC means insurance companies used to take credit for the GST paid on their operational expenses from the GST received on their premium. But now that GST will not be levied on the premium, they will not be able to claim this ITC. This will increase their cost.
Foreign brokerage firms like CLSA believe that to compensate for this loss, insurance companies can increase their base premium by 1-4%. This simply means that policyholders will not get the full 18% benefit. This is bad news for those who were expecting a big reduction in premiums.
Most impact on old policies
According to former IRDAI member Nilesh Sathe, due to not getting the benefit of ITC, insurance companies will definitely suffer losses on new policies, but the biggest burden will come on old policies. The premiums of old policies cannot be increased, so the companies will have to bear this loss themselves. Some companies can bear this burden themselves, while some will try to compensate for it by increasing the premiums of new policies.
The whole math of GST removal
Let us understand with an example how much impact there will be on the premium after the removal of GST. Suppose the base premium of your policy is ₹ 20,000. Due to 18% GST, the total premium used to be ₹ 23,600. At the same time, the company’s operating expenses are ₹ 5,000, on which it used to pay GST of ₹ 900 and claim it as ITC.
Now with the abolition of GST, the company will not be able to claim this ₹ 900. This will make its base premium ₹ 20,900. That is, the customer will have to pay ₹ 20,900 instead of ₹ 23,600. In this way, he will get a benefit of ₹ 2,700 instead of ₹ 3,600, which is a reduction of 11.4%.
Chartered accountant Nitesh Budhdev also says that customers will get the benefit of a reduction in premium, but this reduction will not be 18%. Overall, the removal of GST will definitely provide relief in premiums to policyholders, but due to the increase in the cost of insurance companies, its full benefit will not reach the customers. Still, this is a positive step that will make insurance a little more affordable for the common people.