The Indian government’s decision to reduce the Goods and Services Tax (GST) on health insurance premiums from 18% to 0% has had an unintended consequence on the insurance industry. Insurers are now imposing an 18% GST on commissions paid to agents and distributors to offset losses from the withdrawal of input tax credit (ITC). This move has come as a major blow to insurance intermediaries across the country.
The GST cut means that insurers can no longer claim ITC on commissions, rewards, and other corporate expenses such as rent, technology, and manpower. As a result, insurers are passing on the GST cost to agents and distributors, which could squeeze smaller distributors and individual agents. For example, if the commission for a sale is Rs 100, the amount payable will reduce by 18% to Rs 84.74.
Industry experts warn that this new structure could make health insurance distribution less profitable or unviable for many agents, unless companies revise commission structures or offer alternative incentives. While customers may gain marginally from lower premiums, the ripple effects are being felt sharply across the industry. Insurers face higher operating costs, and distributors face lower earnings.
The problem stems from how the GST framework treats exemptions. For a company to claim input tax credit, there must be a GST component on its output. With the health insurance sector’s GST set to nil, insurers lose this offset mechanism, and expenses on rent, IT systems, advertising, outsourcing, and agent commissions will add up as unrecoverable costs.
Several insurance companies, including Aditya Birla Health Insurance, Care Health Insurance, Star Health Insurance, and ICICI Lombard General Insurance, have acknowledged the challenge and are passing on the GST cost to distributors. They have reiterated their commitment to passing on the entire GST benefit to customers, but noted that the exemption benefits customers while simultaneously increasing operational costs for insurers. The companies have stated that they will absorb the impact of GST on expenses, but will pass on the GST on commissions to distributors to maintain equilibrium and protect customer interests.