In a significant move ahead of the Union Budget, the general insurance sector has received a substantial relief amounting to over Rs 18,000 crore. The GST Council has decided to drop the hefty tax demand that had been imposed on insurers, providing much-needed respite to the industry.
The General Insurance Council (GI Council), the apex body of general insurance companies in India, announced the relief measures. These include the cancellation of GST demands on co-insurance and reinsurance commissions, as well as on reinsurance for crop insurance schemes. This decision is expected to bring substantial benefits to both insurers and farmers.
Industry-Wide Relief Measures
The GI Council argued that the GST demands on co-insurance and reinsurance commissions lacked a legal basis. The Council also highlighted the adverse implications of taxing reinsurance on crop insurance schemes, which would not benefit farmers. As a result of their persistent efforts, the GST Council granted the relief, as confirmed by an official from the GI Council.
The GST Council's decision came after extensive consultations with the industry, tax consultants, and the Ministry of Finance. These consultations included feedback sessions and meetings with key stakeholders, culminating in the GST Council meeting held on June 22.
Clarifications on Co-Insurance and Reinsurance Commissions
In a co-insurance arrangement, multiple insurers share the risk of the insured. Typically, the leading insurer collects the entire premium, discharges the GST, and then apportions the premium to the co-insurers. The tax department had previously alleged that the share allocated to the co-insurers constituted an "Outward Supply" under GST law, requiring GST payment. However, the GI Council successfully argued that this transaction should be considered "no supply" under Schedule III of the CGST Act, leading to the cancellation of past GST cases on such transactions.
Similarly, for reinsurance commissions, the tax department had contended that these commissions were the insurer’s income, necessitating GST payment. The GI Council clarified that reinsurance commissions are essentially discounts and should be considered "no supply" under the CGST Act. This clarification has resulted in the dropping of GST demands on reinsurance transactions.
Exemption for Crop Insurance Reinsurance Premiums
The GST liability on policies under government schemes for farmers/crop risk had been exempted from July 1, 2017. However, reinsurance premiums were not exempt until January 24, 2018. The tax department had proposed GST demands for this interim period. The GST Council has now proposed an exemption notification covering this period, effectively dropping the GST demands from July 1, 2017, to January 23, 2018.
Industry Reactions
Tapan Singhel, MD and CEO of Bajaj Allianz General Insurance and Chairman of the General Insurance Council, expressed his satisfaction with the decision. "This decision by the GST Council is a testament to the relentless efforts and advocacy by the GI Council. It brings immense relief to the industry and ensures that the intended benefits of insurance reach the end-users without the burden of tax demands."
Future Proposals
The general insurance industry continues to urge the government to reduce the GST on individual health insurance policies from 18% to 5%. This reduction is expected to encourage more people to avail of these policies as a measure of social security. The industry collected Rs 109,000 crore in premiums under the health portfolio in the fiscal year 2023-24.
The GST Council’s decision marks a significant step towards easing the financial burden on the general insurance sector and enhancing the accessibility and affordability of insurance products for the public.
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