The life insurance industry in India is set to approach the government with new demands after the GST Council recently exempted individual life and health insurance policies from tax. The industry’s primary request is to extend input tax credit (ITC) benefits to distribution costs and renewal premiums of past policies, even under the new zero-GST regime. According to Kamlesh Rao, MD & CEO of Aditya Birla Sun Life Insurance, distribution costs are similar to reinsurance costs, which have already been exempted, and the industry is seeking a similar exemption.
The exemption of GST on individual life and health insurance policies is expected to have a significant impact on the protection business, where GST earlier stood at 18%. Customers will now pay approximately ₹104-105 instead of ₹118 for a ₹100 policy. However, savings products will see only a limited impact, as GST is around 4-4.5% in these products. The effect on embedded value will be minimal, as the exemption applies to renewal premiums as well.
Despite the benefits, insurers are likely to absorb part of the change, with Rao estimating that 12-13% of the benefit will flow directly to customers, while insurers may need to bear 3-5% due to unrecoverable ITC. The inability to claim ITC on ongoing servicing costs will remain a burden for insurers. Nevertheless, Rao believes that the move will strengthen the sector’s long-term growth prospects, as it will help narrow the wide protection gap in India.
The GST cut is in line with the government’s aspiration to ensure that everyone has insurance by 2047. Rao sees it as a welcome step in this direction, as India suffers from low penetration and a wide protection gap. The industry is expected to grow in the long term, driven by increasing demand for insurance products. Overall, the exemption of GST on individual life and health insurance policies is a positive development for the industry, and the government’s move is expected to benefit both customers and insurers in the long run.