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Although the insurance sector is likely to grow following the increased income in the hands of people with the pay hike of seventh pay commission being implemented, the experts opined that the service sector in general and insurance is going to be affected when the Government rolls out the Good and Services Tax (GST) on July 1, 2017.
The introduction of new tax reform or GST in taxation regime in India will bring a significant change in the income level at the hands of common man. For example, if you are paying a bit heavy insurance premiums, be prepared for the new taxation structure as it will cost you more as tax rate may go up to 18 percent.
Majorly, the insurance plans are bifurcated into two parts i.e. protection and investment. The service tax is levied based on the insurance plan.
With the advent of GST, the Insurance Industry will have a negative impact on the cost of premiums and it will rise due to the increase in tax rate from 15 to 18 per cent in case of term insurance plans, ULIPS, health insurance or motor vehicle insurance.
Not only this, the annuity may rise from 1.5 per cent to 1.8 per cent, and renewal plan from 1.88 to 2.25 per cent resulting in the increase of 300 more basis points in taxes.
It is very evident that the taxation cost will increase with the implementation of GST, but this change may bring down the overall compliance cost as the number of taxes which are part of the premium will merge into one tax. Model GST Law also says that Input Tax Credit shall not be available for life insurance, health insurance when such services are used primarily for personal use or consumption of any employee.
Despite many challenges, the insurance sector has grown substantially following the increase in health insurance needs in the last one year. Though the Model GST Law has not yet defined a rate or any provisions related to the insurance sector, the exact position, however, will be determined only after the implementation of the GST. Till then it is to wait and watch for all the stakeholders concerned.