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written by Khatabook | December 15, 2021

Impact of GST on Insurance and Banking

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The Goods and Services Tax (GST), a form of indirect tax, was introduced in 2017. It aimed to eliminate the complicated and divided tax landscape of India that was complicated. These indirect taxes impose a significant cost on the ultimate consumer. With GST, these taxes were grouped into a single, unified umbrella, greatly simplifying the indirect taxing procedure.

The effect of the GST on insurance and banking services has shown an increase in various prices, particularly for households who pay for life, health, and automobile insurance. The services offered by the banking and insurance industries have become more expensive from July 1, 2017, due to an increase in GST rates to 18% from 15%. Since the introduction of GST, every sector has been impacted by it. Therefore, in this article, let’s learn how it has impacted the Insurance and Banking Sector.

What is the GST on Insurance?

Let's know the basic terms and types of life and health insurances:

Term insurance policies- These life insurance policies are the most basic kind. They provide financial protection to the beneficiary in case of the death of the policyholder.

ULIP (Unit linked insurance plan)– A ULIP (Unit linked insurance plan) is a multi-faceted life insurance plan with a single unified plan that requires the policyholder to make monthly payments, with a part of those payments going toward life insurance coverage.

Endowments – A life insurance policy pays a hefty sum or a predetermined monthly amount when the policy matures or when the policyholder dies.

What are the changes because of GST on Insurance Premium?

 An essential fact of GST on insurance policy is how it applies differently to various life insurance products. Insurance applicants should be aware of it. Some of them are mentioned below:

  • GST is charged at a regular rate of 18% on premium payments for term insurance plans, the most economical life insurance.
  • GST is also paid at 18% on life insurance in the form of Unit-Linked Insurance Plans (or ULIPs). This includes GST on insurance premium payments as well as fund management fees.
  • GST is handled differently on traditional life insurance policies, often known as endowment plans. GST is charged at 4.5% on the first year's premiums and 2.25% on the following years' premiums.
  • The GST amount for life insurance for single-premium annuity products is 1.8%.  

Category

Service Tax (in percentage)

After GST (In percentage)

ULIP Charges

15

18

Health insurance premium

15

18

Term Insurance premium

15

18

All of these rates will shift to 18%, resulting in a premium rise. The following is the amount of the service delivery in connection to the life insurance vertical:

1. The value of supply of services in connection with a life insurance business shall be the gross premium, except the value earmarked for investment or savings on behalf of the policyholder if such an amount is disclosed.

Particulars

Under Service Tax

Under GST

Gross Premium

1000

1000

Investment Portion

600

600

Life Insurance Portion

400

400

Service tax at 15% on 400

60

 

GST @18% on 400

 

72

Also Read: Where Can Input Tax Credit under GST Not Be Availed?

 2. Annuity policies with a single premium are valued at 10% of the insurance premium. 

3. In all other circumstances, the premium payable increases by 25% for the first year and 12.5% for the second year and onwards.

Gross Premium (per annum)

1000

First Year

 

25% of the total amount

250

GST at 18% on 250

62.50

Second Year

 

12.5% of the total amount

125

GST at 18% on 125

22.50

4. If the premium applies to the entire life insurance, GST will apply to the full premium.

What is the impact of GST on Insurance?

Existing and new policyholders experienced an increase in premiums due to the increase in rates. The increasing number of GST returns, and the taxability of inter-branch services are expected to raise insurers' compliance and administrative costs.

General Insurance

 Fire insurance, vehicle insurance, marine insurance, and theft insurance are all examples of general insurance. General insurance would also be subject to the 18% GST rate. 

Impact of GST input credit on Insurance Premium 

Due to the increase in the tax rate from 15% to 18%, policyholders' general insurance premiums would rise. Moreover, the input tax credit is unavailable for general, life, and health insurance plans. Business policyholders that offer health and group life insurance to their employees will not be eligible for input tax credits.

Life insurance purchased through Government Schemes is free from GST:

  • Janashree Bima Yojana (JBY)
  • Varishtha Pension BimaYojana
  • Aam Aadmi Bima Yojana (AABY) 
  • Pradhan Mantri Jan Dhan Yojana
  • Pradhan Mantri Jeevan Jyoti Bima Yojana
  • Pradhan Mantri Vaya Vandan Yojana
  • Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having the maximum cover of Rs. 50,000
  • The Central Government provides life insurance to members of the Army, Navy, and Air Force.
  • The Central Government provides life insurance to members of the Army, Navy, and Air Force.
  • The Government may notify any other insurance scheme of the State Government of India on the recommendation of GSTC.

What is the GST on Bank Charges?

 Bank charges GST are now subject to a 15% service tax, which will rise to 18% from 2017 under the GST. Customers will pay more for banking services, just as they will for insurance if taxes rise.

Most banks now impose transaction fees for cash withdrawals from various bank ATMs and cash withdrawals from branch locations. These are subject to a 15% service tax, which rose to 18% under the GST scheme from 2017. However, for corporate policyholders, the change has resulted in a positive impact. These policyholders who have taken general insurances can now benefit from an input tax credit on the bank GST charges paid on their policies. 

When you consider the nature and volume of work done by banks and NBFCs, such as hire purchase, lease transactions, operations related to actionable claims, fund and non-fund based services, it's clear that the implementation of GST will have a significant impact on both businesses and borrowers across the board. 

Non-Banking Financial Corporation (NBFCs)

 NBFC is a corporation registered under the Companies Act, 2013. It engages in commercial operations such as providing loans and advances and the acquisition of stocks, shares, debt, and other securities given by the government or any local authority.

Furthermore, any non-banking company carrying out the business activities of a financial institution shall be regarded as an NBFC under the Reserve Bank of India (RBI) Act, according to section 45-I (c). As a result, the MCA (Ministry of Corporate Affairs) and the RBI (Reserve Bank of India) oversee and regulate this corporate structure (Reserve Bank of India). 

Various Services Provided By Banks and NBFCs

 The services supplied by banks and non-bank financial companies (NBFCs) may be divided into two categories, which are stated below:

  •  Working capital requirements, portfolio management, lease and hire purchase and factoring services, retail loans, micro-credit, and private equity are examples of fund-based services.
  • Merchant Banking Services, Project Advisory Services, Credit Rating Services, Capital Restructuring Services, and other non-fund services are examples.

Due to the type and number of financial services supplied by banks and NBFCs, GST compliance in these industries is extremely tough.  

What are the Issues Relating to GST Provisions?

  • Large number of branches leading to complicated registration processes –

In the current setup, all NBFCs and banks operating on a pan-India basis may register and release their service tax compliances through a single, centralised system. However, under the goods and services tax, NBFCs and banks would be required to seek a separate registration for each state in which they will be performing their activities and obligations.

Along with registration, the compliance burden for filing GST returns has increased significantly. GST has given rise to a multi-stage system because it was recognised as a destination-based regime. GST compliance is a challenge to look forward to, although it has reduced taxation and performed effectively for the sector by improving cash flow.

  • Leveraged and unleveraged input tax credits

Banks and NBFCs now choose to reverse 50% of Central Value Added Tax (CENVAT) credit used for inputs and input services, whereas CENVAT credit used for capital goods can be used with no reversal requirements. Under GST, 50% of the CENVAT credit claimed on inputs, input services, and capital goods would be reversed, leaving them with a 50% credit on capital goods, raising their cost of capital.

  • Assessment and adjudication have become inconvenient

The evaluation would be carried out by the state authorities in charge of the branch in question. Every registered branch of a bank or a non-bank financial company (NBFC) must now defend its stance on its charge in each state, as well as the justification for claiming input tax credits in various states.

Because the GST would include several adjudicating authorities, each body may have a different conclusion on the same fundamental problem. This discrepancy in viewpoints will cause the adjudication process to drag on.

Currently, a taxpayer is adjudicated on a single issue by a single adjudicating body. Various adjudicating authorities may take different positions on the same topic under GST. It would be difficult to resolve and cope with the differences of opinion supplied by the various adjudicating authorities.

GST Benefits for NBFCs and Banks

  • The goods and services tax is notable for preventing tax evasion and reducing the establishment of parallel economies. It will aid financial institutions in gaining benefits in the future as the need for funds increases and transaction accountability improves.
  • Before the introduction of the GST, banks were only given a partial credit of CENVAT. Aside from that, no state VAT credit on the purchased products was gained. As all indirect taxes would be absorbed under GST, credit for the applicability of goods and service tax on purchased commodities will be available.

Revenue Recognition Issues in the GST 

  • Financial Services which are Account Linked

On the supplier's records, the place of supply will be the location of the recipient of services. In India's computerised and centralised environment, determining the state of residence of service recipients would be challenging. When service recipients, such as professionals, manufacturers, traders, and other workers, frequently move from one location to another in search of better opportunities, the service provider may have multiple addresses, including a current address, a permanent address, and a KYC, and a communication address.

  • Financial Services which are Non-Account Linked

The location of the service provider would be the site where the service is provided. This will once again affect enterprises who have established a presence in remote places yet operate and transact from a back office in another state.

  • Actionable Claims

As actionable claims do not qualify as a service under the existing Service Tax scheme, no tax is due. Actionable claims are now components of a supply of goods under GST. Services supplied from discounted bills to securitisation (a process of loans, receivables or other financial assets are grouped with their cash flows to support payments or related securities) will now primarily be charged as a B2C and B2B effect.

Also Read: Refund Process Under GST- Situations That Can Lead To GST Refund Claims

Conclusion

 After the GST system was implemented in India, it was expected to alter the Indian economy by helping small, and large firms increase their overall efficiency and production. On the other hand, the financial industry may have difficulties doing business, managing client profiles, and managing the IT system to run and capture data, all of which will necessitate more sophisticated compliance and processes.

Due to the increase in banking and insurance GST rates in the insurance sector, all policyholders would have to pay higher insurance premiums. A family with life, health, and auto insurance will see a 3% increase in insurance costs. If they spend Rs. 10,000 on insurance each year, excluding service tax, their costs will rise by 3% or Rs. 300. Therefore, there are some disadvantages to GST in the banking sector along with benefits. 

For more information related to GST, income tax, business tips and more, subscribe to Khatabook 

FAQs

Q: How has GST impacted financial services?

Ans:

Banking services are now subject to a 15% service tax, which will rise to 18% under the GST. Customers will pay more for banking services, just as they will for insurance if taxes rise.

Q: How has GST impacted life and general insurance premiums?

Ans:

GST is charged at a regular rate of 18% on premium payments for term insurance plans, the most economical life insurance. The general insurance premium will increase for policyholders as the tax rate is raised from 15% to 18%.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.