'GST Exemption Offers Relief to Consumers but Brings Operational Challenges for Insurers'

Since September 22, India has entered into a new era of the Goods and Services Tax (GST). Dubbed by many observers as GST 2.0 and described as a “Diwali bonanza” by Prime Minister Narendra Modi, the reforms are arguably one of the most significant tax reforms in recent years. It introduces a simplified and more transparent system that will foster growth, improve compliance, and reduce the consumer’s burden.

The GST Intervention in Insurance

The insurance sector, particularly life and health insurance, has received special attention in the GST reforms. In keeping with the principle of supporting essential services, life and health insurance have been recognised as critical tools for financial protection and long-term savings. The GST council has aligned itself with the Insurance Regulatory and Development Authority of India’s (IRDAI) agenda of “Insurance for All by 2047” and accordingly, has endeavoured to make insurance products more affordable and accessible. 

The exemption from GST bestowed on life and health insurance has simplified the arithmetic. A policyholder paying Rs 1,000 earlier now receives nearly 18% additional coverage for the same outlay. Often, households treat insurance as a discretionary expense. The tax relief may encourage them to improve their financial planning and, as a result, lead to greater participation in formal protection instruments. 

Balancing Benefits and Cost Implications 

While the GST exemption offers noticeable relief to consumers, it brings new operational challenges for insurers. Under the previous regime, insurers were able to claim Input Tax Credit (ITC) on goods and services used in the course of business. With life insurance premiums now exempt, this benefit is no longer available.

For most life insurers, the expenses that were earlier set off by claiming ITC account for approximately 8–10% of total operating costs. With the benefit of ITC being removed, these costs will have to be absorbed by the insurers and consequently, will eat into their margins.  The rules about pricing and the long-term nature of insurance contracts make it tough to handle these extra costs. As a result, insurers need to look for other ways to cut costs and improve efficiency to provide the full benefits of GST reform to policyholders. 

The pricing inflexibility in life insurance adds to the complexity. Once a premium rate is set at the inception of a policy, it remains unchanged for the entire duration. It leaves the insurer without any room to manoeuvre when costs escalate or input credits cease to exist. Along with the same, insurers have to rightly maintain an IRDAI-mandated minimum solvency ratio of 1.5 -- crucial for securing the confidence of the policyholder. This creates a critical mandate for the CFO's office -- absorbing the incremental costs while maintaining margins and crucially, without compromising the solvency ratio.

Ready to Roll

While it is a no-brainer that the complete benefits of the tax exemption have to be passed on to the customer immediately, the planners in the insurance sector will have to optimise distribution frameworks to mitigate cost pressures. 

Already, we see insurers working together to find a suitable formula. India’s life insurance industry operates under one of the most progressive and policyholder-focused regulatory frameworks in the world. The sector has shown consistent flexibility, growing at a rate faster than GDP while supporting national goals of financial inclusion and long-term savings.

As the GST 2.0 regime evolves, insurers are excited about the new era that will be characterised by increased awareness and response of customers. The sector anticipates that the demand for protection and security products across the life insurance spectrum will increase. The CFO’s office, meanwhile, is gearing up to pave the way for aligning business models with the reform’s objectives -- ensuring transparency, protecting policyholders’ interests, and strengthening trust in the financial ecosystem.

Kedar Patki is Chief Financial Officer at IndiaFirst Life Insurance.