GST Reforms Impact: Insurers to Absorb Costs as Input Tax Credit Excluded for Individual
Insurers will no longer be able to claim input tax credit (ITC) on Goods and Services Tax (GST) for commissions and brokerage related to individual health and life insurance policies starting September 22. This decision, announced by the Central Board of Indirect Taxes and Customs (CBIC), aligns with the upcoming implementation of a new GST slab structure that exempts premiums for these policies from the 18% tax rate. The change is expected to impact the financial operations of insurance companies significantly.
Changes to Input Tax Credit Regulations
The CBIC has clarified that, effective September 22, insurers will not be able to recover input tax credits on commissions, brokerages, and other related expenses associated with individual health and life insurance policies. This means that the taxes already paid on these inputs will become an additional cost for insurance companies, rather than recoverable through credit. The only exception to this rule is reinsurance services, which will continue to be exempt from ITC claims. This shift is part of a broader effort to streamline the GST framework and reduce the tax burden on consumers.
Impact on Service Providers
The new regulations will also affect service providers in other sectors that fall under the 5% GST slab without ITC. For example, hotels charging Rs 7,500 per day or less and providers of beauty or wellness services will not be able to claim credits for inputs used exclusively for these services. If goods or services are used partially for supplies taxed at 5% without ITC and partially for other taxable supplies, service providers will need to reverse a proportionate amount of credit. This approach aims to simplify compliance but may increase costs for service providers, as they will have to absorb the GST costs on inputs.
Clarifications on Exemption Scope
The CBIC has specified that the exemption from GST applies solely to individual life and health insurance policies issued to a single person or their family. Group insurance plans do not qualify for this exemption. Additionally, all other input services related to these individual policies, including commissions and brokerage fees, will require ITC reversal. The CBIC has reiterated guidance on other goods and services affected by GST rationalization, including a reduction in the GST rate for sand lime bricks from 12% to 5%, while other brick categories remain at 6% without ITC or 12% with ITC.
Consumer Benefits and Compliance Challenges
While the reduced GST rates are intended to benefit consumers, experts warn that service providers will need to manage the embedded GST costs on inputs carefully. Rajat Mohan, Senior Partner at AMRG & Associates, emphasized the importance of meticulous accounting to ensure proper ITC reversal where applicable. The changes coincide with the rollout of the new GST structure, which aims to simplify the tax system by reducing the number of tax slabs and exempting premiums for individual health and life insurance from GST. As these regulations take effect, both insurers and service providers will need to adapt to the new compliance landscape.
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