The Central Board of Indirect Taxes and Customs (CBIC) will engage with the insurance industry to develop a transition mechanism for accumulated input tax credit (ITC) related to policies exempted from tax starting September 22. Finance Minister Nirmala Sitharaman announced this after the GST Council decided to exempt GST on premiums paid for individual life and health insurance policies. Currently, an 18% GST is levied on premium payments for such policies.
The exemption will affect the accumulated ITC of insurance companies, which could impact their finances. To address this, the CBIC will work with stakeholders to establish a transitional arrangement. Sitharaman hopes this arrangement will be in place before September 22, but its implementation will depend on industry engagement with the board.
The GST Council has approved a two-tier GST structure with rates of 5% and 18% for most goods and services, as well as a special rate of 40% for tobacco and ultra-luxury items. The new rates will be effective September 22, except for tobacco products, which will continue to be taxed at 28% plus a compensation cess until December 31.
As part of the GST rationalization, individual life insurance, reinsurance services, and certain other services will be exempt from GST. In the previous fiscal year (FY24), the government collected ₹16,398 crore from GST on healthcare and life insurance, including ₹8,135 crore from life insurance and ₹8,263 crore from health insurance. The government also collected ₹2,045 crore from reinsurance on life and health insurance in FY24.
The exemption of GST on healthcare and life insurance services is expected to have a significant impact on the industry. The government has collected substantial revenues from GST on these services in the past, with ₹16,770 crore collected in FY23, including ₹9,132 crore from life insurance and ₹7,638 crore from healthcare insurance. The transition mechanism being developed by the CBIC will aim to mitigate the impact of the GST exemption on insurance companies and ensure a smooth transition to the new tax regime.