Indian Insurance Sector Pushes for 'Zero-Rate' GST to Offset Tax Credit Losses

The Insurance Brokers’ Association of India (IBAI) is planning to approach the GST Council and the Central Board of Indirect Taxes and Customs (CBIC) with a proposal for a 'zero-rate' GST structure. This comes after the recent rationalization of GST, which exempted retail term and health insurance policies to make them more affordable. However, this exemption inadvertently blocked input tax credit (ITC) for insurers and intermediaries, leading to increased costs.

A 'zero-rate' tax structure means that GST is not charged on the output (premiums), but businesses can still claim credit for taxes paid on their inputs (like broker commissions, office rent, etc.). This contrasts with the current exemption, where ITC is lost, forcing insurers to either trim agent commissions or potentially increase base premiums.

Industry representatives believe that a zero-rated regime would align incentives and preserve affordability for policyholders. However, the proposal faces hurdles, as it requires a significant policy shift and could impact revenue sharing between the Centre and states. While some insurers, particularly standalone health insurers, are supportive due to the impact on their business model, life insurers, especially public sector ones, are more cautious. HDFC Life Insurance Company Limited, for instance, is already exploring ways to realign distributor commissions. The government's stance is currently unclear, and past attempts for relief were unsuccessful. The outcome could also set a precedent for other sectors impacted by GST rationalization.

Impact: This news can have a moderate impact on the Indian stock market, particularly affecting listed insurance companies and financial services firms. Changes in tax structure directly influence profitability and operational costs. Rating: 6/10

Terms and their meanings: GST (Goods and Services Tax): A consumption tax levied on the supply of goods and services in India. Input Tax Credit (ITC): A mechanism in GST where businesses can claim credit for taxes paid on inputs (raw materials, services) used in their business, reducing their final tax liability. Zero-rate: A tax treatment where goods or services are taxed at 0%, but businesses can still claim ITC on inputs used to produce them. This is different from an exemption. Exemption: A situation where a good or service is not subject to GST. When an item is exempted, businesses cannot claim ITC on inputs used to provide that exempted item. Intermediaries: Entities that facilitate transactions between buyers and sellers, such as insurance brokers and agents. Cascading Tax Burden: A situation where taxes are levied at multiple stages of production or distribution without a mechanism to offset previous taxes, leading to a higher final price. Compensation Cess: A tax levied by the central government to compensate states for any revenue loss during the transition to GST.