Insurance sector to face initial hiccups post-GST as tax regime to impact insurers
The Indian insurance industry will face a temporary brunt as GST implementation will certainly impact insurers as well as individual policyholders.
At the stroke of midnight on July 1, 2017, the most anticipated and, at the same time, a highly debated Goods and Services Tax (GST) was launched in India. The central tax reform witnessed a lot of fanfare and was also boycotted by certain stakeholders, especially within the political circle. However, businesses and end consumers were the most involved.
The implementation of GST is meant to de-clutter the current multi-layered federal, state and local indirect tax structure. GST will be one of the biggest tax reforms since Independence and is expected to reshape India's business landscape by making the country a lucrative destination to do business with and would work towards bringing down barriers between the states.
GST will unify at least 10 types of indirect taxes into one tax, to be collected at federal and state levels. Under the existing structure, at each point of sale, additional taxes are applied to the after-tax value of goods and services. The main purpose of GST is to eliminate this compounding effect by fixing a final tax rate where goods and services will fall under one of the four tax categories - 5 per cent, 12 per cent, 18 per cent and 28 per cent brackets.
The primary beneficiaries of GST will be businesses (manufacturers, retailers, traders and more) for whom a uniform market across India would open up a window of opportunities. A uniform regulation across the country is expected to make compliance easier. It will also lead to cost savings, and the benefits will flow to end customers in the long run as far as reduced pricing is concerned.
Impact on insurance
The Indian insurance industry will face a temporary brunt as GST implementation will certainly impact insurers as well as individual policyholders. Typically, a policyholder pays a service tax on the risk element of the premium component while the investment element is usually out of the service tax scope. With the implementation of GST, life insurance policies will become dearer by 3 per cent. However, the amount of service tax will vary depending on the risk element embedded in the premium component and tax will be levied only on the risk portion of the premium and not on the saving portion. Therefore, the immediate impact of GST would be higher in term insurance and endowments plans.
For general insurance products, the cost of purchasing policies will undoubtedly increase due to a 3 per cent rise in service tax from the current 15 per cent (including Krishi Kalyan Cess of 0.5 per cent and Swachh Bharat Cess of 0.5 per cent) to 18 per cent.
With the introduction and implementation of GST, health and auto insurance policies will also become expensive as these will attract a tax of about 18 per cent on premiums. For instance, if a person was earlier paying a premium of Rs 10,000 with Rs 1,500 as service tax included in the premium, now he/she will have to pay a total of Rs 10,300 (including Rs 1,800 as service tax) for the same product with a net impact of Rs 300.
Moreover, input tax credit is not allowed for health and life insurance although the government makes it obligatory for employers to provide it to its employees.
Credit will be available when goods and/or services are used to deliver the same category of services or as a part of a composite supply. However, input tax credit is not allowed for retail customers as the goods and/or services are used for personal consumption.
As for products/insurance policies sold online, norms have been prescribed for e-commerce companies to go for TCS (tax collected at source) of 1 per cent. They will have to deduct 1 per cent of the taxable value of premium for all new and renewal businesses as tax collected at source.
After implementation, insurance companies have to make amendments regarding the renewed transaction handling, registration compliance, operations and information systems as GST implementation demands restructuring of these components in their entirety.
Initial hiccups for insurers
- For insurance companies, business processes need to be updated as GST is a destination-based tax, and tax is collected by the state where the goods or services will be consumed. Under the GST regime, service providers are required to obtain registration for all the states that they are catering to, i.e., all the states where they have customers. It has to be done so that the State Goods and Services Tax (SGST) component of Integrated Goods and Services Tax (IGST) is rendered for respective states. Hence, insurance companies have to bifurcate their services and invoice their customers based on the location of consumption.
- GST will require restructuring of accounting, administration and control mechanism in the IT systems and processes of the insurance companies, to be able to maintain financial records of each state separately. Such compliance may lead to requirements for additional resources at the branch as well as at all main offices. Operational systems such as vendor management and a system for KYC (know your customer) check/address verification have to be adopted. The upgrades will bring an additional cost to insurance companies for the short term.
- GST levied on branch transactions need to be catered carefully due to the enormous number of financial transactions being carried out.
- Records of policyholders are to be maintained efficiently. Under GST, the place of service supply will be the location of the service recipient on the records of the supplier. Hence, records need to be maintained correctly.
- For obtaining the reversal of input tax credit, insurance companies have to organise their respective vendors and intermediaries and include their respective identifications to claim input credits.
Even though the tax hike post-GST is nominal, the increase in total outflow could be quite significant for many policyholders. For someone paying annual premiums for auto, household, healthcare, term plan and personal accident cover, say a total of Rs 50,000 a year, there could be a jump in the premium outflow by Rs 1,500 a year, with no additional risk coverage or benefits. The rise in premium may impact the demand for insurance products in the short run. However, as the increase is universal in nature and GST will bring benefits indirectly with a net improvement in disposable income, the net impact may get cushioned off in the future.
(The writer is Rajiv Kumar - Managing Director and Chief Executive Officer, Universal Sompo General Insurance)