Karunesh, who is a garment manufacturer in Banglore, is a financially organized individual. As a part of his financial planning, he has taken an adequate amount of life insurance, home insurance, motor and health insurance policies to protect his family and his properties against any financial loss. Karunesh allocates a substantial amount of money annually for the payment of premium towards his multiple insurance policies.
Though Karunesh is aware about the new GST Bill being passed in both the houses of the parliament, but at the same time, he is keen to have a basic understanding about the GST. Karunesh, also intend to know that how the new GST bill will impact his existing financial investments and outflows like yearly payout of insurance premiums.He is keen to know the impact of GST on his insurance premiums.
Let us take Karunesh through some important aspects of GST bill and the implication on his insurance premiums.
Goods and Services Tax (GST)
GST Bill was passed in Lok Sabha on 8th of August 2016.It will be a single tax levied on the goods and services purchased. GST bill will dilute numerous other taxes which are levied by the state and the center separately. GST will eliminate the cascading impact or double taxation of the taxes on the product or service availed.
The tax rates imposed more than once in the making of the product or service till it reaches the end consumer results in an increase in the price of a good or a service. With the GST reform, the incidence of the taxes paid at different intervals in the value chain will be minimized benefitting every party involved in the value chain.
GST will architect the current tax structure of the country by merging multiple taxes into one tax.This tax structure will be simpler and less cumbersome.
Impact of GST on Insurance Premium
The government has set up a GST Council, which will be leaded by the Finance Minister, Mr. Arun Jaitley. The GST council will be responsible for setting up of the GST rate. The proposed GST rate is either 18% or 22%, which is on the higher side as compared to the current service tax rate of 15% (14% basic service tax plus 0.5% Swachh Bharat cess and 0.5% Krishi Kalyan cess).
The proposed GST rates are surely going to increase the insurance premium payout for Karunesh and others as well from April 2017 or later. The insurance premiums will rise by 3% (300 basis points) or 7% (700 basis points) basis the proposed GST Tax rate of either 18% or 22% as of now.
Life Insurance Premiums
The term plan premium for Karunesh is anticipated to rise by 3% or 7%. This will put a huge impact on the affordability of the basic life insurance plans in the country. Term plans are considered to be the most affordable plans as these plans are the pure protection plans with no investment component attached to such plans. This is the reason, the premium for a term plan is lower and affordable as the plan only provides a death benefit during the policy term.
Currently Endowment and ULIP premiums are charged service tax at a differential rate, which is 3.75 % for the first premium and 1.88% for the premiums paid for the second year onwards.With the implementation of GST rate, the premiums are anticipated to rise to 4.50% (if the GST rate is fixed at 18%) or 5.50% (if the GST rate is fixed at 22%) for the fist year. For the subsequent premiums, the GST rate applicable, will be 2.25% or 2.75%.
Non-Life Insurance Premiums
Karunesh’s health insurance premium, motor insurance premium, home insurance premium which is part of the non life stream of the insurance industry will also see an anticipated rise to 18% or 22% from the current level of service tax of 15%.
Key takeaways for Karunesh
- GST rate will certainly be more than the current service tax rate, which will certainly increase the cost of insurance.
- Continuation of concessional or differential rates on Endowment & ULIP’s is still to be decided by the GST council, which will define the attractiveness of such insurance plans.
- Health, motor and other non life insurance premiums are likely to rise as well.Since non life policies are short term contracts ad needs to be renewed annually, Karunesh, needs to analyze and compare the policies offering maximum benefit with the lowest cost, post implementation of GST.
- The exact amount or percentage of the rise in insurance premium will be known once, the final GST rate is fixed.
Karunesh, needs to re-frame his financial plans and should consult his financial advisors. Insurance is an important risk mitigation tool which cannot be avoided or discontinued.It is imperative for Karunesh to analyze his financial outflows and be prepared to create a little more space for the accumulation of his insurance premiums with the increase in the cost of premium. A comprehensive cost and benefit analysis of the insurance policies will fetch Karunesh the maximum returns and complete financial protection.