GST: Will your insurance premium become cheaper as input tax credit uncertainty looms?

A day after the next generation GST reforms were approved by the GST Council, some segments within the service sector have expressed concerns. It is believed that lowering of GST to 5% or even zero per cent without the benefit of input tax credit in certain segments may increase the price for the end consumer rather than lowering it.

Experts say the issue of GST reduction without the benefit of input tax credit may affect insurance and other services sectors as well, like gyms, hotels and restaurants. “Take, for example, the hotel sector, or the gyms. 5% GST without input tax credit would mean that they will have to revise the prices. The same is the situation with the other services. This is a real challenge for the hotels and gyms. This issue pertains mainly to the services sector,” a GST expert told Fortune India.

“Hotel accommodation having value of supply of a unit of accommodation less than or equal to Rs 7500 per unit per day or equivalent will now attract 5% GST without input tax credit, compared with 12% with ITC earlier. GST on beauty and physical well-being services has been lowered to 5% without ITC, against 18% with ITC earlier,” according to a government release issued after the GST Council meeting.

The insurance sector is not left behind. This comes after GST got totally exempt from life insurance and health insurance policy premiums. Insurers would be hoping that this is not the end and there would be further rationalisation of GST in the future. The Chairman of CBIC (Central Board of Indirect Taxes and Customs) clarified that neither the benefit of inversion nor the input tax credit (ITC) would be given to the insurance industry.

Karthick Jonagadla, smallcase Manager and Founder Quants Research, says, "Under GST, insurers can credit input taxes on IT, TPAs, call centres and distribution; if premiums are made exempt, CGST Act 17(2) blocks ITC, turning vendor GST into embedded cost."

This means that under GST, insurers were allowed to take credit for the tax they pay on services such as IT support, third-party services, call centres, and distribution. This way, they used to reduce their overall tax burden because they paid on input, adjusting it against the GST they collected on the insurance premium. However, insurance premiums are now exempt from GST.

Section 17(2) of the CGST Act comes into play. As per this section, insurers cannot claim input tax credit on the services they use. This means, the GST they pay to vendors or any other services they take, they cannot recover that, and in turn, it gets added to their overall operational cost. This way, it increases the cost of insurance, as the unrecoverable GST will be added to the final cost of providing insurance.

Jonagadla further explains, "GST exemption on insurance is limited to ₹118, while health premiums keep increasing every year. He further says, "Current cost stacks anchor the arithmetic: ICICI Lombard’s Q1FY26 combined ratio 102.9%; New India Assurance 116.16% (commission 8.54%, opex 7.86% of NWP); Go Digit 108.6% with expense ratio 38.3%; Star Health 99.6% with expense 30.1%. On pure tax mechanics, removing 18% output GST while losing ITC typically keeps the all-in price below ₹118 unless base rates are lifted for other reasons."

Adding to it, Hanut Mehta, CEO and Co-founder at BimaPay Finsure, says, "The absence of input tax credit will increase their operational cost. Over time, some of these costs may flow into base premiums, and as a financing partner, we’ll have to keep adapting to these shifts."

"In short, the premiums may not decrease to the extent of the reduction in GST, as insurers factor in the adverse impact of non-allowance of duty inversion and ITC," said Jyoti Prakash, Managing Partner, Equity and PMS at AlphaaMoney.