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Rediff.com  » Getahead » Be prepared to pay more for your insurance policy

Be prepared to pay more for your insurance policy

September 07, 2016 15:43 IST

The premium on insurance policies will get costlier by 3 per cent to 7 per cent, depending upon the rate fixed by the GST Council from April 1, 2017, says Harjot Singh Narula.

Illustration: Uttam Ghosh/Rediff.com

The passage of Constitution (122nd) Amendment, Goods & Services Tax Bill in both Rajya Sabha and the Lok Sabha, will dissolve the indirect taxes levied by the Centre like Service Tax, Central Excise Duty, etc. and other taxes like the Value Added Tax, Luxury Tax, Octroi, Entry Tax, etc. levied by the State.

This reform will bring multiple taxes submerged under one common roof of GST. The bill seeks to establish a GST Council, which will be the prime authority to decide the taxation rates and ensure the optimum collection of taxes in the country.

The GST Council will be chaired by the Union Finance Minister.

What is GST?

Goods and Services Tax (GST) is a single inclusive tax levied on the goods purchased or the services availed by the consumer. This bill will submerge the multiple taxes levied by the state and the union separately, which otherwise resulted in the cascading effect of the taxes.

Cascading effect implies ‘Tax on Tax’ due to the multiple taxes levied at different stages of the production of goods and services till it reaches the end consumer. The multiple tax rates impose a burden on the layman due to an increase in the price of a commodity or service which is being taxed at multiple junctions.

There is no provision for setting off the tax incidence in the supply chain as of now, but with the implementation of the GST reform, the consumer, at last, will enjoy setting off the taxes paid in the previous stages of the value chain.

Let us further discuss the incidence of GST on the Insurance premium paid by the policyholder.

What is the current Service Tax scenario?

The current scenario suggests that the service tax levied on the services is at the rate of 15 per cent, which includes 0.50 per cent Swachh Bharat Cess and 0.50 per cent Krishi Kalyan Cess over and above the 14 per cent of the basic service tax figure.

Life insurance policies:

For the insurance industry, service tax has two slabs on the life insurance product. Under the life insurance stream, for a pure risk protection plans which are term plans attract a 15 per cent service tax.

Endowment plans and saving plans, which have more of investment and saving components, are charged under concessional service tax rate of 3.75 per cent for the first premium for the first year and 1.875 per cent of the service tax on the subsequent premiums.

As far as pension plans are concerned, on a single premium annuity policy, a service tax of 1.5 per cent is levied.

Non life insurance policies:

Health, motor and other non life insurance policies currently attract a service tax of 15 per cent on the insurance premium.

What are the implications on the insurance, premium under the GST regime?

The proposed rates of Service Tax under the GST regime will be 18 per cent or 22 per cent. This implies that there will be a steep increment in the amount of the current insurance premiums paid by the policyholders.

The insurance premiums will aggravate by 300 basis points or 3 per cent, if the rate of tax is glued at 18 per cent.

On the other hand, the insurance premium will rise steeply by 700 basis points or 7 per cent, if the rate of tax is fixed at 22 per cent from the current level of 15 per cent with effect from April 2017 or later.

Example: If you are currently paying Rs 1000 as an insurance premium for your term plan, you are paying Rs 150 as service tax; the total premium comes to Rs 1150 that you pay to your insurance company.

But with an enhancement in the tax rate under GST reform, you will pay an increased premium of either Rs 1180 (if the GST rate is fixed at 18 per cent) or Rs 1220 (if the GST rate is fixed at 22 per cent by the GST Council).

The Arvind Subramanian Committee has, however, recommended a GST rate of 18 per cent along with inculcating the differential pricing for specific products.

Segment wise implication on the various types of policies:

Life insurance policies:

Term plans are the pure risk protection plans which will pay the policy value in case the insured dies during the contract term. There is no maturity value or investment component attached to a plain vanilla term plan.

Service tax rates on term insurance premium will witness an abrupt increase from 15 per cent to the proposed 18 per cent or 22 per cent GST on the basic premium.

In case of the life insurance plans like endowment plans or savings plan, there is a differential pricing followed as these specific products have more of investment component than the risk component associated with its framework.

The tax is anticipated to rise up to 5.50 per cent and for renewal premiums up to 2.75 per cent if the tax rate is fixed at 22 per cent or will rise to 4.50 per cent and 2.25 per cent for the subsequent premiums, if GST is fixed at 22 per cent.

For single premium annuity policy, the service tax rate will rest either up to 1.8 per cent or 2.2 per cent under the new regime.

Non life insurance policies:

Health, motor and other non-life insurance premiums will also witness a rise in service tax from the current level of 15 per cent to 18 per cent or 22 per cent from April 2017 or later.

The premium will get costlier by 3 per cent to 7 per cent, depending upon the rate fixed by the GST Council.

Conclusion

Insurance is purely taken to financially protect your loved ones or your property or any third party loss in the event of the covered risk resulting in a loss.

Under the new GST regime, it is evident that the premiums are likely to rise. This calls for a rework in your allocation of resources towards the financial instruments held at your end.

Planning your finances early will save you from the sudden outflow of financial resources. You may also consult an online/offline financial expert(s) for the same.

If you intend to buy an insurance plan, it is important to compare an insurance plan considering the new tax regime before making a final buying decision. Buy an appropriate plan meeting your requirements and financial security to avert the impact of any kind of risk associated to you, your family or your property.

Harjot Singh Narula is founder and CEO, ComparePolicy.com

Harjot Singh Narula