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GST Countdown: Will Premiums On Insurance Plans Cost You More? 

Will the cost of buying a ULIP, term insurance and endowment plan go up after July 1?

GST Countdown: Will Premiums On Insurance Plans Cost You More? 

The Goods and Services Tax (GST) Council has set the rates for services at 18 percent, higher than the current tax incidence of 15 percent. Come July 1, will the premiums on your insurance plans will cost you more? On BloombergQuint’s special series, GST Countdown, we spoke to Kedar Parkhi, chief financial officer at IDBI Federal Life insurance.

Here are edited excerpts from the conversation.

Did the 18 percent rate come as a surprise to the industry or was it anticipated?

The finance minister was supposed to set rates at multiple levels and we were expecting the rate to be either 12 or 18 percent and we were ready for both. We are here with 18 percent now.

How does the tax incidence work today because in various life insurance plans - whether its ULIPs or endowment plans, there is a risk premium and a savings part. Take me plan by plan and help me understand how does the current incidence of tax work?

There are valuation rules and its not insurance premium as such but every kind off insurance will have a certain abatement. So while a term insurance will attract the full 100 percent rate, if you talk about endowment, the first year premium is a 75 percent abatement. That means 25 percent of the premium is considered to be the taxable value for the purpose of insurance.

Taking endowment plan as an example, if I am investing Rs 100 in an endowment plan, I will currently be paying 15 percent on Rs 25.

I am paying 15 percent for Rs 25. Going forward I will pay 18 percent on Rs 25.

How will it work for term plans? Any risk portion at all?

Term plans are pure risk products and so 100 percent of the insurance premium is considered to be valued. So Rs 18 on a Rs 100 premium will be tax.

For endowment plans, the rate of tax will change from year to year? How will that work out?

For the first year, the abatement is 75 percent. Which means I pay tax on 25 percent of the premium that I have paid for the first year. Second year onwards, it is at 12.5 percent, so 87.5 percent is considered to be the abatement and on 18.5 percent, I will pay the tax of 18 percent.

While you at IDBI don’t have plans which are health plans or insurance for cars etc, those plans don’t have any savings component at all. So the incidence of tax will be on the whole component that I pay on the premium, at 18 percent. While this percentage sounds all good, what does it means for the consumers or the policyholders on July 1. Am I going to see an increase in my premium cost once GST kicks in?

I will take this in two parts. Yes, as a customer I was paying 15 percent and under GST it is going to be 18 percent. Especially for life insurance, it is different because I have committed my premiums for next 15, 20, 25 years. And on that I would have calculated my premium outgo, which is going to go up by 3 percent of the premium. That is on one side. Having said that, insurance companies will get credit for certain taxes that they were not getting earlier.

Can you elaborate on the taxes which you are not getting a credit for today?

For VAT, CST we are not getting credit. The Swachh Bharat cess which we were paying, it was not creditable. But all these taxes are now being subsumed, so now they will be available for credit. Now we will have to see how much the cost goes down for us and we will be keen to pass it on to our customers to the maximum extent possible.

On the input side, what sort of services, as a financial sector, do you have to take on which you will get credit now?

We have insurance commission which is big piece, we have reinsurance premium that we pay, we have sponsorship costs that we incur. All services that we use to provide services to end customers, will become input services on which we will get credit.

You mentioned insurance commissions. You will have many more insurance agents who will be selling your products. It’s not that each of those guys will have to get registered, it’s you as an entity which will get registered and again the tax will work on reverse charge basis there?

So it’s a very big thing for the insurance sector. Today, there are around 20 lakh insurance agents and for them having to comply with the tax requirements individually would have been very difficult, but thanks to the reverse charge mechanism we as the receiver of service pay the tax and get the credit for that as input service charge.

Will that mean that the commissions will come down in any fashion?

No, the commissions will not come down.

Now that you will move to a more technology-savvy tax system and the network is called the GSTN, how much of the change is it for you as in the financial industry?

It’s a sea change and thankfully GST rollout has been on the cards for a while and I can speak for life insurance. Through Life Insurance Council we have had multiple rounds of discussions in terms of how we can be prepared for this kind of rollout. But it’s a huge change because the way we compute taxes, we have to make changes in many backend systems. Secondly, the bigger change will be in terms of returns and reconciliation. We will have to file returns along with our vendors and corporate customers and the whole input credit mechanism has to work seamlessly. That’s a big change which we as an industry will face.

So there are very defined timelines for your GSTR forms, how will it work for you?

So we get a few days to file our return and a few more days for reconciliation with all our input credit suppliers in terms of correcting the mismatches and everything has to be in completed within 20 days from the end of the month, so that is quite stringent. If you look at tech-savvy companies, it is simpler but you have vendors that are just starting out and it’s very important that everybody really comes up the curve.

Have your vendors come up to you with any problems or challenges?

No, we have pro-actively started connecting with them asking them if they require help from us. As far as we are concerned, we are fairly there, but there could be industries where the vendor base or customer base is extremely large.

You earlier pointed out to me a challenge, not specific to financial services but across industries, where you incur a certain cost, but you don’t get the input credit for that in time. Specifically for the insurance industry because your rates are regulated by the IRDA, what are the challenges you could face, do you expect that maybe your margins may be squeezed?

Very valid point, what premiums we charge are regulated, they are decided upfront and we cannot charge more or less. So in this kind of scenario if I am not able to get my input credit because of my vendor’s return challenges or reconciliation issues, that will become a cost for me and squeeze my margins. The other aspect to that is even our expenses are regulated, so we are allowed to spend X, put to a particular level in terms of premium and sum ensured. And that could create a challenge but I am sure the industry will work together on this and things will settle down. You might have some teething trouble initially, but I think it’s a step in the right direction by the government. I look forward to seeing a much more connected, well governed economy in this fashion.

You said that invariably the price for the end customer will go up because the cost of premium will go up. Do you anticipate any sort of demand dip because of increased cost on any particular kind of product? For instance, in India many consumers are still very up to speed or understand the value of a term plan, because you don’t see any savings or returns come out of it in your lifetime. And on that product there is now an 18 percent tax. Do you think the demand for that will vary?

We were looking at lower rate to improve the penetration and to improve the reach of term insurance as a product where a large percentage of the Indian population is still not covered thanks to Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). The reach has improved, but we were looking at that. I guess in short run it might affect the decisions of the buyers, but in the long run, once the tax system gets settled down, my take is that since it is going to broaden the tax base, overall tax rates have the possibility of coming down or settling down very well.