GST exemption may shrink policyholders’ savings as insurers may hike premiums by 3-5% to offset ITC loss: Report

Insurance companies may have to increase their premiums by 3-5% to cover the loss of input tax credits incurred because of the 18% GST exemption on individual health and life insurance policies, estimates a report by Kotak Institutional Equities. At the same time, a price reduction of 12-15% for consumers could significantly increase demand for health insurance, it added.

As part of the Centre’s rate rationalisation measures, individual life and health insurance policies, including reinsurance, which were taxed at 18%, have been exempted from GST starting September 22.

Currently, companies claim input tax credits (ITC) on services such as distribution commissions, reinsurance, promotions, and other operational costs. Although reinsurance services will also be GST-exempt, companies will still be required to pay GST on other services. To negate the loss incurred on the ITC front, a premium hike in both new and existing retail policies may be necessary to achieve margin neutrality, the report adds.

It notes that insurance firms cannot benefit from the inverted tax structure (ITS) because these policies are classified as “exempt”. The government has not announced ITS benefits for the insurance sector.

The report indicates that Star Health likely paid ₹3,000 crore in GST in FY25, based on an 18% GST rate applied to all health policies. The company paid ₹2,600 crore in GST after deducting ITC. This means ₹400 crore was ITC on services used by the company. However, with GST 2.0, the ITC benefit on items other than reinsurance, proportional to the retail business, is now lost. To maintain margins, the company will need to increase tariffs by around 1-3%.

The report also highlights that each insurer will be affected differently by the GST exemption and the lack of ITC. “The change in tax rate is expected to impact Niva Bupa more significantly (~4%) than Star Health (~1%) due to its higher expenses and ceding ratio. Niva Bupa has a higher end-of-month (EoM) ratio of 39% compared to 31% for Star Health, and a ceding ratio of 22% versus 7%. This results in higher GST payments for Niva Bupa, which cannot be offset by input tax credits since GST on retail health policies is now 0%,” it states. Similarly, Care Health Insurance will have to increase the premium by around 2%, the report adds.

It also highlights three possible risks in this scenario. First, tariff increases might not happen immediately but could be delayed. Second, some customers might take advantage of the one-month free look-back period to surrender policies sold last month and switch to newer, more affordable ones. Third, multi-line insurance companies may experience a lesser impact, as other business lines could partially offset the GST on shared services.

In summary, life and general insurance often involve complex GST calculations because of multiple lines of business. Analysts are awaiting further details from life insurance companies regarding how the GST exemption will impact individual life policies and reinsurance.