Goods and Services Tax (GST) is an indirect tax which was introduced

in India on 1 July 2017 and was applicable throughout India which

replaced multiple cascading taxes levied by
the central and state governments. It was introduced as The Constitution
(One Hundred and First Amendment) Act 2017,[1] following the passage
of Constitution 122nd Amendment Bill. The GST is governed by a GST
Council and its Chairman is the Finance Minister of India. Under GST,
goods and services are taxed at the following rates, 0, 5%, 12% ,18%
and 28%. There is a special rate of 0.25% on rough precious and semi-
precious stones and 3% on gold.[2] In addition a cessof 15% or other
rates on top of 28% GST applies on few items like aerated drinks, luxury
cars and tobacco products.[3] GST was initially proposed to replace a
slew of indirect taxes with a unified tax and was therefore set to
dramatically reshape the country's 2 trillion dollar economy. [4] The rate of
GST in India is between double to four times that levied in other
countries like Singapore

Taxes subsumed
The single GST replaced several former taxes and levies which
included: central excise duty, services tax, additional customs
duty, surcharges, state-level value added tax and Octroi. Other
levies which were applicable on inter-state transportation of
goods have also been done away with in GST regime. GST is
levied on all transactions such as sale, transfer, purchase,
barter, lease, or import of goods and/or services. India adopted
a dual GST model, meaning that taxation is administered by
both the Union and State Governments. Transactions made
within a single state are levied with Central GST (CGST) by the
Central Government and State GST (SGST) by the government
of that state. For inter-state transactions and imported goods or
services, an Integrated GST (IGST) is levied by the Central
Government. GST is a consumption-based tax, therefore, taxes
are paid to the state where the goods or services are
consumed not the state in which they were produced. IGST
complicates tax collection for State Governments by disabling
them from collecting the tax owed to them directly from the
Central Government. Under the previous system, a state would
only have to deal with a single government in order to collect
tax revenue.[20]

Rates
The GST is imposed at different rates on different items. The rate of
GST is 18% for soaps and 28% on washing detergents. GST on
movie tickets is based on slabs, with 18% GST for tickets that cost
less than Rs. 100 and 28% GST on tickets costing more than Rs.10.
The rate on under-construction property booking is 12%. Some
industries and products were exempted by the government and
remain untaxed under GST, such as dairy products, products of
milling industries, fresh vegetables & fruits, meat products, and
other groceries and necessities. The introduction of the GST
increased the costs of most consumer goods and services in India
including food, hotel charges, insurance and cinema tickets. Upon
its introduction in the country, GST led to a number of protests by
the business community, primarily due to an increase in overall
taxes and hence the prices of goods.
Checkposts across the country were abolished ensuring free
and fast movement of goods.
The Central Government had proposed to insulate the
revenues of the States from the impact of GST, with the
expectation that in due course, GST will be levied on petroleum
and petroleum products. The central government had assured
states of compensation for any revenue loss incurred by them
from the date of GST for a period of five years. However, no
concrete laws have yet been made to support such action.

GST and Insurance

The impending implementation of GST would undoubtedly
impact ones personal finances especially when it comes to
financial services, albeit marginally. From the present rate of 15
percent, the GST on banking, insurance and investments such
as real estate, mutual funds will see a hike of 3 percent as the
GST will now be 18 percent on them.
Primarily, there are three major kinds of life insurance products
Term insurance plans, Ulips and Endowments (including
money back). The applicability of service tax (in the current
format) on their premium is not similar in all three of them.

The premium paid in life insurance policies represents two

portions risk coverage and savings. The service tax is only on
the risk portion of the premium and not on savings portion.

As per the GST rules, the value of services (on which GST is to
be imposed) in relation to life insurance business shall be:

(a) The gross premium reduced by the amount allocated for

investment, or savings on behalf of the policy holder.

(b) In case of single premium annuity policies, ten per cent of

single premium charged from the policy holder.

(c) In all other cases, 25 per cent of the premium in the first
year and 12.5 cent of the premium in subsequent years. So, if
the premium of an endowment plan is Rs 100, the GST of 18
percent will be applicable on the 25 percent of the premium i.e.
on Rs 25, so, Rs 4.5 will be the GST amount.

(d) If the entire premium paid by the policy holder is only

towards the risk cover in life insurance such as in term
insurance plans, the GST of 18 percent will be on the entire
premium.

Therefore, the immediate impact of GST would be the higher

outgo (premium plus GST) in term and endowment plans, due
to the increase in rate of tax on insurance following
implementation of the GST. "In theory, this could mean an
increase of 3% in premium from the existing applicable
premium effective from 1st July 2017, across life, health and
general insurance, however, some of this should be offset if tax
on services availed by the industry are allowed to be taken into
account to decrease insurers' tax paid," says Mathieu Verillaud,
Chief Financial Officer, Bharti AXA General Insurance.

The policyholders may stand to benefit only if the insurance

companies are allowed the benefit of input tax credit. "This
unfortunately is not clear as of yet given the complexity of the
state/centre structure of GST, this might drive some confusion
as well as higher compliance and administrative costs for
insurers. If these are not passed on to customers, prices might
either go up, or stay low but will affect the market's solvency
and financial health," says Verillaud.

Similar will be the impact on general insurance such as car,

health and other non-life policies i.e. service tax (when replaced
by GST) will increase by 3 percent of the premium amount.
This would increase total outgo (premium plus tax).
IMPACT
The overall impact could be nominal but once implemented,
both, existing and new policyholders will have to bear the
additional cost. If the current premium of a term plan is Rs
10,000, (excluding the service tax of 15 percent) the GST
impact will up the premium including tax by Rs 300 i.e from Rs
11,500 to Rs 11,800. While, comparing premium especially of
term plans, make sure you are looking at premiums including or
excluding GST for all the insurers. Nothing changes in the
selection process.

CONCLUSION
The Indian life insurance industry has come a long way indeed,
especially in the last decade. Back in the day, people viewed
insurance primarily as a tax planning and investment tool, something
that people thought gave better returns while saving on pesky taxes.
In a country like ours, where social security doesnt exist and one
cannot boast of viable retirement schemes, seeking protection for
the future becomes a compelling preoccupation. And that is where
buying insurance comes into play. Post-liberalization, the insurance
sector witnessed significant growth spurred by the joining of private
insurers, product innovation, and induction of multiple distribution
channels. This was further encouraged by the increase in the foreign
direct investment (FDI) limit, from 26% to 49%. Since then, insurance
companies, along with the Insurance Regulatory and Development
Authority of India (Irdai), have been making concerted efforts to
develop the insurance sector in India. As a result, we see a significant
number of private players operating in the market today, and a lot of
product innovation catering to specific consumer needs. In spite of all
the progress in the sector, India continues to be a massively under-
penetrated market. We are the worlds second most populous nation,
and yet we account for less than 1.5% of the worlds total insurance
premiums and about 2% of the worlds life insurance premiums.
According to a Swiss Re report, there is a big gap in insurance in
Indian households. For every $100 needed for protection, only $7.8
of saving and insurance is in place for a typical Indian household,
leaving a massive mortality protection gap of $92.2, says the report.
Given the scenario, how will the goods and services tax (GST) impact
the growth momentum of this industry? Of the four GST slabs5%,
12%, 18%, 28%insurance falls under the 18% slab, as against the
previous service tax of 15%. The increase in indirect taxation is
contrary to the positive measures that have been taken over the last
few years to develop this sector. Governments across the world, even
in the more mature markets, are known to make conditions
favourable for insurance protection. In many countries, life insurance
is outside the purview of GST. In a few, cash flow system is followed
for general insurance, e.g. in countries like Australia, Singapore, and
South Africa. For the latter, tax is charged on the premiums received
and credit is allowed for claims that are paid. In the Asia-Pacific,
where some countries account for the worlds highest insurance
penetration, GST and value-added tax (VAT) are not levied on
insurance products. Exceptions would be some cases in China, where
policies of less than one year attract a 6% tax and Taiwan and the
Philippines, where tax of 2-5% is charged outside GST framework.
Even in the West, countries like Canada, and the European Union, do
not tax life insurance. This tells us that these governments
understand the need for insurance protection and encourage it by
supportive policy. Under the GST regime in India, taxability on the
gross premium for pure risk policies is contrary to the principle of
taxing the value addition. GST is a tax on value addition and net
premium after deduction of claim is the net value addition. It is very
difficult to segregate the savings component and find a value that
could be treated as the proper base for tax, particularly for every
premium transaction during the life-cycle of an insurance policy. We
have witnessed impressive growth in this sector so far, but there
needs to be a sustained effort to retain the growth momentum.
Imparting financial literacy, incentivizing Indian households to
transfer savings from physical assets to financial assets and taking the
distribution network to rural areas are expected to help bring more
individuals under the insurance blanket. The coming years are critical
as the policy and regulatory environment and consumer response
will govern the growth and stability of this industry. Buying insurance
will continue, provided insurance companies have the right kind of
solution-based selling approach and to that extent, a favourable
indirect taxation structure would have helped. Insurance companies
in India have strived hard to create financial awareness and increase
insurance penetration in the country. As the country strides into a
new economic phase, we hope that the industry gets the attention
and support that it rightfully deserves.