The curious case of insurance and GST
Dear Readers,
What gave me and am sure you too goosebumps this week was the medals Indian athletes won at the Paris 2024 Olympics. The victory of our sportspersons on the globe’s biggest competitive stage is inspiring.
Apart from this, something unexpected happened this week. Nitin Gadkari, a Cabinet Minister and senior BJP leader, wrote to Finance Minister Nirmala Sitharaman seeking the withdrawal of 18 percent Goods and Services Tax (GST) levied on life and health insurance policies. In his official letter, he stated that levying GST on insurance is like imposing a tax on the uncertainties of life.
Gadkari is the first minister to raise the issue, but the insurance sector, including IRDAI, has been very vocal about it and has also petitioned the GST Council in the last five years.
The background
Gadkari’s demand is very important as 18 percent GST has been a speed breaker and policyholders are going through a bumpy ride, especially when insurance is part of social security.
Before GST, a 15 percent service tax was applicable on insurance policies. In fact, insurers then were pitching to reduce service tax or withdraw it. However, after the implementation of GST, all indirect taxes including service tax were merged into GST and 15 percent service tax became 18 percent for insurance policies. Since then, policyholders are facing the heat, because for the premium of Rs 10,000, the policyholders are paying Rs 1,800 GST every time they buy or renew.
What should the government do?
India is far away from becoming a developed economy, where the purchasing power is decent and people can cover their risks with insurance policies. Hence, the government should look at financial inclusion and review the GST on insurance policies, which has become an alternative for covering the risk of life.
If not the whole insurance sector, the government should at least look at the most critical policies, such as term insurance and health insurance, to begin with. With inflation and rising hospital costs, health insurance premiums have also gone up. For cover of Rs 10 lakh, if someone is buying a health policy of Rs 30,000, he has to pay Rs 5,400 of GST, which is highly exorbitant.
What can insurance companies do?
While the GST is a tricky subject, I strongly think we should not only blame the government. To some extent, insurance companies are also responsible. Insurance policies are still very expensive and it is high time companies start underwriting policies that are affordable to the masses. To cover their margins the companies are not interested in selling micro insurance products. Senior citizens can't buy the products at all, because most of the policies cost Rs 50,000 upwards. Companies should look at the per-capita income of Indians and also note that 80 crore people subside on free rations from the government. Will this group of people buy policies which are sold in the market today? Also, senior citizens cannot buy policies because they are too expensive. Another challenge is complex products. I have written a detailed article on this. Many people who were unsatisfied with the rejection of their claim never buy insurance later.
Insurance companies position themselves as a social business but like other businesses, they give preference to shareholders' profit, business value, etc. Of course, every business should be profitable and sustainable, but there should be some factors as the business belongs to social security.
In the last five years, insurance companies have begun onboarding customers digitally. They are also servicing customers digitally. By using advanced data and analytics tools, they have also curtailed fake claims. All of this has helped them reduce their costs significantly. The onboarding process before digital was cumbersome and expensive. But have companies passed these benefits to customers? I remember many insurance honchos telling me that they would extend the cost benefit to customers if dematerialisation happened. But they never did.
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So while insurance companies argue that the government should reduce taxation, they should also think about social responsibility.
If the government withdraws the GST, the question is what will insurers do? Will they cut premiums by some percentage because there is a hope that they will get more business? As Gadkari's letter became viral on social media, the stock prices of HDFC Life Insurance and SBI Life Insurance companies went up by 3 percent. So, the companies operating in the business of risk should also take some risk.
It is high time insurers should also deliberate upon that despite 22 years of privatisation why the penetration hasn’t picked up. Why do people still stay away from insurance and don't even buy insurance, which is for a few cents for train travel? We can simply blame them for ignorance, but we can also question whether insurers have developed any trust. So, insurers should focus more on covering more lives than the profit numbers. Because they otherwise pay hefty commissions to agents in various forms.
The government will certainly think over a hundred times before taking a final call on 18 percent GST because it is significant revenue for them. But till then, we have to also note that GST is not the only cost of the policy. Will the withdrawal of GST boost insurance sales and take penetration to the next level? We don't know. But there is a possibility. Ultimately, the policyholder or customer should benefit and lives should be covered.
As usual, I am sharing with you the top five stories of the week, trust you will find them meaningful:
Happy Reading,
Amol Dethe
Editor
ETBFSI