If the Goods and Services Tax (GST) bill is passed, having even basic insurance policies – life, health, and motor – could be costlier, as taxpayers could end up paying up to 300 basis points more, starting on April 2017.
This development is likely to hit the middle class the hardest, as they depend more on insurance for savings instead of on stocks and other investments.
Currently, a service tax of 3.5% is levied on protection part of endowment and unit-linked life insurance policies in the first year, and 1.75% in succeeding years. This is likely to go up to 4.5% in the first year and 2.25% in the next years.
"Insurance premium rates will go up by 50-300 basis points when GST is passed," said Naresh Makhijani, head of financial services for KPMG
. "There is greater challenge in complying with the GST laws, deciding on where to pay tax. If the proposal is accepted in one state but the policy is issued from another, where does one pay premium?"
The insurance industry believes that higher tax rates are detrimental, especially with declining insurance penetration. Life insurance penetration growth has declined, from 4.6% in 2009 to 2.6% in 2016.
To counteract this, the Life Insurance Council, India’s representative body of life insurers, asked the finance ministry to levy GST only on the premium collected, but not on the investment portion where insurers function purely in a fiduciary capacity.
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