Input Tax Credit In Insurance

Health insurance premiums in India have become more affordable after the government removed the 18 per cent goods and services tax (GST) on them. Now the question is: will your premiums reduce by that much? Likely not. That’s because of something called input tax credit (ITC), a benefit that helped insurers reduce operational expenses, thanks to GST paid by policyholders on premiums. With zero GST on insurance premiums, ITC has now become irrelevant for insurers.

Let’s understand what is ITC, how insurers have used it to reduce operational expenses in relation with the GST you paid earlier, and how it could affect insurance premiums in the future.

What Is ITC?

• ITC was introduced under GST to ease the burden on companies. It allows companies to claim deduction on the tax paid on expenses by offsetting it against the GST collected from buyers of their product.

• Insurers pay GST on services and expenses such as the use of technology, call centres, hospital tie-ups, marketing, advertising, and commissions. This tax paid was adjusted against the GST paid by policyholders, which effectively reduced their operational costs.

• Now, insurers will not be able to make that adjustment as there will be no GST collected on premiums.

• They will now have to absorb the GST paid on inputs, which will increase their cost.

Will It Affect Premiums?

• For now, policyholders are expected to benefit from zero GST. For example, family floater plan that costs Rs 59,000, including GST, will now cost Rs 50,000. That will ease burden for individuals and translates to substantial savings.

• GST rationalisation will make insurance more affordable for first-time buyers and encourage more households to buy insurance protection.

• However, since insurers will still pay GST on services and wouldn’t be able to claim deduction on it, they may choose to revise the base premiums over the long term to balance the extra cost.

• Insurance premiums over time will depend on how insurers balance their operational costs with competitive pricing.

What Can Insurers Do

• Lower premiums will attract more customers, so some insurers may keep premiums steady and competitive. To do that, they may cut other costs by streamlining processes, focusing on digital services or negotiating better rates with network hospitals.

• After the GST rate cut, several insurers have said they already have systems to trace policy costs, making GST exemption compliance relatively straightforward. They say impact on margins are manageable and no major disruption is expected.

• While smaller, retail-focused insurers will feel margin pressure and may raise premiums sooner, the larger, more diversified insurers may have the flexibility to absorb shocks and gradually adjust pricing and commissions.