GST Changes Hit Insurance Agents: Commission Cuts Due to Input Tax Credit Loss Unlikely to Get Government Intervention

The Goods and Services Tax (GST) 2.0 framework introduced an exemption for individual life and health insurance policies starting September 22, 2025. While this offers a marginal benefit to customers with zero GST on premiums, it has significant implications for insurers. They are now ineligible to claim input tax credit (ITC) on various services like advertising, brokerage, and distribution, effectively increasing their operating costs.

To mitigate these higher costs and maintain profitability, insurance companies have reportedly reduced commissions paid to agents and brokers by up to 18 percent. This has led insurance agents to petition the Finance Ministry and the GST Council for relief.

However, government officials have indicated that the GST Council is unlikely to intervene. They view the commission cuts as a commercial arrangement between insurance companies and their agents, a matter outside the council's purview, which focuses on tax policy rather than business terms. The industry was aware of the implications of the exemption regime, and adjustments in payouts are seen as a necessary renegotiation of terms.

Impact: This situation directly affects the income of insurance agents and puts pressure on the profitability of insurance companies by increasing their effective operating costs. The distribution network faces a challenge, potentially impacting customer service and sales strategies. The overall impact on the Indian insurance sector could lead to consolidation or a shift in how distribution channels are managed. Rating: 6/10

Difficult terms: GST: Goods and Services Tax, a comprehensive indirect tax on the supply of goods and services. Input Tax Credit (ITC): A credit that taxpayers can claim for taxes paid on inputs used for their business, reducing their final tax liability. GST Council: The apex body that makes recommendations on GST rates, structure, and policy. Fitment Committee: A committee of officers that examines taxability and rate proposals before they go to the GST Council. Premium: The payment made by a policyholder to an insurance company for coverage. GST 2.0: Refers to recent or upcoming significant changes in the Goods and Services Tax regime.