GST and the insurance sector
The Indian life insurance industry has come a long way indeed, especially in the last decade. Back in the day, people viewed insurance primarily as a tax planning and investment tool, something that people thought gave better returns while saving on pesky taxes.
In a country like ours, where social security doesn’t exist and one cannot boast of viable retirement schemes, seeking protection for the future becomes a compelling preoccupation. And that is where buying insurance comes into play.
Post-liberalization, the insurance sector witnessed significant growth spurred by the joining of private insurers, product innovation, and induction of multiple distribution channels. This was further encouraged by the increase in the foreign direct investment (FDI) limit, from 26% to 49%. Since then, insurance companies, along with the Insurance Regulatory and Development Authority of India (Irdai), have been making concerted efforts to develop the insurance sector in India.
As a result, we see a significant number of private players operating in the market today, and a lot of product innovation catering to specific consumer needs.
In spite of all the progress in the sector, India continues to be a massively under-penetrated market. We are the world’s second most populous nation, and yet we account for less than 1.5% of the world’s total insurance premiums and about 2% of the world’s life insurance premiums.
According to a Swiss Re report, there is a big gap in insurance in Indian households. For every $100 needed for protection, only $7.8 of saving and insurance is in place for a typical Indian household, leaving a massive mortality protection gap of $92.2, says the report.
Given the scenario, how will the goods and services tax (GST) impact the growth momentum of this industry?
Of the four GST slabs—5%, 12%, 18%, 28%—insurance falls under the 18% slab, as against the previous service tax of 15%. The increase in indirect taxation is contrary to the positive measures that have been taken over the last few years to develop this sector.
Governments across the world, even in the more mature markets, are known to make conditions favourable for insurance protection. In many countries, life insurance is outside the purview of GST.
In a few, cash flow system is followed for general insurance, e.g. in countries like Australia, Singapore, and South Africa. For the latter, tax is charged on the premiums received and credit is allowed for claims that are paid.
In the Asia-Pacific, where some countries account for the world’s highest insurance penetration, GST and value-added tax (VAT) are not levied on insurance products. Exceptions would be some cases in China, where policies of less than one year attract a 6% tax and Taiwan and the Philippines, where tax of 2-5% is charged outside GST framework.
Even in the West, countries like Canada, and the European Union, do not tax life insurance. This tells us that these governments understand the need for insurance protection and encourage it by supportive policy.
Under the GST regime in India, taxability on the gross premium for pure risk policies is contrary to the principle of taxing the “value addition”. GST is a tax on value addition and net premium after deduction of claim is the net value addition. It is very difficult to segregate the “savings” component and find a “value” that could be treated as the proper base for tax, particularly for every premium transaction during the life-cycle of an insurance policy.
We have witnessed impressive growth in this sector so far, but there needs to be a sustained effort to retain the growth momentum. Imparting financial literacy, incentivizing Indian households to transfer savings from physical assets to financial assets and taking the distribution network to rural areas are expected to help bring more individuals under the insurance blanket.
The coming years are critical as the policy and regulatory environment and consumer response will govern the growth and stability of this industry.
Buying insurance will continue, provided insurance companies have the right kind of solution-based selling approach and to that extent, a favourable indirect taxation structure would have helped.
Insurance companies in India have strived hard to create financial awareness and increase insurance penetration in the country. As the country strides into a new economic phase, we hope that the industry gets the attention and support that it rightfully deserves.
Subhash Pillai is chief financial officer at Tata AIA Life Insurance.