GST impact on Insurance

GST impact

Implementation of Goods and Services tax (GST) legislation to simplify the current multilayered federal, state, and local indirect tax structure will be one of the biggest tax reforms since independence and is expected to reshape India’s business landscape by making the country an easier place to do business in and would bring down barriers between states.

The GST bill will unify at least ten types of indirect taxes into one tax to be collected at the state and federal levels. Under the existing structure, at each point of sale, additional taxes are applied to the after-tax value of each good and service. The main purpose for the GST is to eliminate this compounding effect by fixing the final tax rate, where goods will fall into one of four rate categories of 5, 12, 18, and 28 percent.

The primary beneficiaries of GST will be businesses (Manufacturers, Retailers, Traders etc.) for whom a uniform market across India would open up a window of opportunities. A uniform regulation across India is expected to make compliance easier. This would lead to cost savings and the benefits will ultimately flow to end customers over the long run in terms of reduced price on products and services.

A look on how GST is rolled out in other countries

France is the first country to implement GST in 1954. Today 160 countries have GST/VAT. Most European countries introduced GST back in the 1970-80s.

China completed value added Tax (VAT) reform in 2016 to replace its conflicting business tax system. However, this is also stated to be responsible for Chinese real estate bubble. Japan introduced consumption tax in 1989 at the rate of 3%. In 1997 this increased to 5% and Japan went to a recession. In 2012 Diet doubled the tax to 10%.In Malaysia, GST has been implemented in 2015. After initial hiccups things have been settling down with 70% respondents reported business growth in last 12 months. Australia introduced GST in 2000 while in New Zealand it has been introduced in 1986 at 10%. Canada introduced GST in 1991, has a dual model like India (state and central GST) although Canada gives an option to the provinces to go for state or central GST. In Singapore, GST was introduced in 1994. Inflation spiked and NGO, a social activist group opposed GST. However, today inflation has eased and GST is the second largest source of revenue after corporate I-T.

Countries which opted for GST were faced with a scenario of high inflation and slowdown in consumption initially. However, whether the history of other countries will be repeated in India depends on a host of factors to which exact estimation will be difficult to be made at this juncture. With general insurance perspective, lower disposable income and subdued demand may impact demand for general insurance products in short run as in India insurance product are income elastic and still are not a kind of necessary commodities.

But, undoubtedly over medium to long run, GST will lead to higher revenues for the center and states (on broadening the tax base as a higher number of items are now included under tax net) while also increasing the size of the economy and having a positive impact on GDP.  Over a period of time ‘One nation one tax’ and the abolition of entry tax/octroi will mean a seamless movement of goods across state borders and prevent cascading of taxes. It is also expected to improve export as well as exports. Since the tax is levied at the consumption point, there will be no need to check trucks for goods that could be evading tax in the originating state. It could also give a push to a formalization of the economy as small firms that do not need to register for GST because they are below the threshold may decide to in order to get the benefit of input tax credit.

Besides GST is also a part of digitization revolution, which along with the reform on the information tax side in terms of the process and operation, have potential to broaden the tax base considerably.

However, in immediate short term, some concerns are

• GST being a dual structure with both Central & State being a recipient of tax, organizations are now needed to review their procurement strategies for cost effective purchasing.
• Another concern is associated with a taxable value under GST regime, as per the legislature, the taxable value should be “transaction value”. It will be a challenge for an organization which deals with complex transactions like captive supplies and consumptions, Leasing of capital equipment etc.
• With the compliances raised to an exorbitant level, Firstly the organizations need to get registered at each of the states of operations, secondly, they have to track each input tax credit which has to settle across the supply chain across various locations before financial closing to get tax refunds if any.

Impact on Banking

Banking sector plays a very crucial role in macro economic and monetary policies of any country overall framework and the business dynamics of this sector largely differs from other sectors. The implementation of the Goods & Services Tax (GST) on banking segment will likely prove to be a challenge initially on two counts –

• First, due to the higher GST rates compared to the current service tax rate and
• Second, due to the vast geographical reach of most banks.

Banks having branches in multiple States and Union Territories (UTs) shall register in each such State or Union Territory. Accounts and administration will be cumbersome as transactions between two branches of the same bank are now set to trigger the tax. Concerning place of supply of goods and services, supply identification will be required for taxation purpose under GST regime.

Earlier power to levy and collect service tax vests with a center, but after the introduction of GST States would also be empowered to levy GST on services. Besides, different types of services to customers like Credit Card, Debit Card, Cheque Clearance, Internet banking, NEFT, RTGS, IMPS, Funds Transfer, Demand Account etc will become taxable under the ambit of goods and sales tax.

Impact on Insurance

The insurance industry is also not going to remain untouched from its impact. It will certainly be going to have an impact on the insurance industry as well as policyholders. Typically, policyholder’s pay service tax on the risk element of the premium component whereas the investment element of the policies is usually out of the service tax scope.With the implementation of the GST, life insurance policies will become costlier by 3%, however, the amount of service tax will vary depending upon risk element embedded in premium component and tax will be levied only on risk portion of the premium and not on saving a portion. Therefore the immediate impact of GST would be higher in term and endowments plans.

For general insurance, the cost of purchasing policies will undoubtedly increase due to an increase of 3 % in service tax from current 15% (including krishi kalyan cess (0.5%) and swachh bharat cess (0.5%) to 18%.

With the introduction and implementation of the GST, the cost of purchasing the common health and motor insurance will become expensive as it will attract a tax of about 18 % on premium. So if a person was paying a premium of 10,000 with 1500 as service tax, now he has to pay 1800 as service tax with 10300 as a premium for the same product with a net impact of Rs 300.

In other important considerations, Input Tax credit is not allowed on health insurance and life insurance except the following

Government makes it obligatory for employers to provide it to its employees

• Goods and/or services are taken to deliver the same category of services or as a part of a composite supply, credit will be available
• Input tax credit is not allowed for Retail Customers as the Goods and/or services are used for personal consumption.

For product/insurance policies which are sold online, norms have been prescribed for e-commerce companies under the GST Law to tax collected at source (TCS) of 1% and they will have to deduct 1% of the taxable value of premium for all new and renewal business as tax collected at source.

 After implementation, Insurance companies have to make amendments regarding the renewed transaction handling, registration compliance, operations, and information systems, since GST implementation demands restructuring these components in their entirety.

Initial hiccups for insurers

• For insurance companies, the business process needs to be updated as GST, is a destination-based tax, and tax is collected by the state where the goods or services will be consumed. Under the GST regime, service providers are required to obtain registration for all the states that they are catering to, i.e. all states that they have customers in. This is to be done so that the SGST (State Goods and Service Tax) component of IGST (Integrated Goods and Services Tax) is rendered for respective states. Hence insurance companies have to bifurcate their services and invoice their customers based on the location of consumption.
• GST would require restructuring of accounting, administration and control mechanism in the IT systems and processes of Insurance companies to be able to maintain financial records of each State separately. Such compliance may lead to the requirement of additional resources at the branch as well as center level. Operational systems like vendor management systems, a system for KYC Check/address verification etc need to be adopted. These updations will bring an additional cost to insurance companies for the short term.
• GST being levied on branch transactions need to be catered carefully because of the enormous number of financial transactions being carried out.
• Record policy holders to be maintained efficiently: Under GST Law the place of supply of services for insurance companies shall be the location of the recipient of services on the records of the supplier of services. Hence records need to be maintained correctly.
• For obtaining the reversal of input tax credit insurance companies have to organize their respective vendors and intermediaries and include their respective identifications to claim input credits.

Even though the hike will be nominal, taken together for all the insurance covers, the increase in the outflow could be something to account for by many policyholders. For someone paying an annual premium for the car, household, health, term plan, personal accident cover, a total of say Rs 50,000 a year could see a jump in premium outflow by Rs. 1,500 a year, with no additional risk coverage or benefits. The rise in premium may impact on demand for insurance product in short run which has not been mandated by the government. However in the long run as the increase is universal in nature and GST will bring benefits indirectly with a net improvement in disposable income, the net impact may get cushioned off in future.