Insurance agents across the country have raised concerns over a sharp reduction in their commissions following the rollout of the GST 2.0 framework, which made individual life and health insurance policies exempt from GST.
In a representation to the Finance Ministry and the GST Council, several insurance agents' associations have claimed that private insurers have reduced their commission payouts to offset losses arising from the withdrawal of ITC benefits.
However, sources in the government indicate that the issue is unlikely to be taken up by the GST Council, as it is being viewed as a commercial arrangement between insurers and their agents and not a policy matter.
Government's Stance: Not a GST Policy Concern
A senior government official told Moneycontrol that the Fitment Committee and the GST Council are not expected to discuss the matter since it does not fall under the purview of tax policy.
"Agents are understandably concerned because their commissions have been cut following the withdrawal of ITC benefits," the official said. "But this is essentially a commercial matter between insurance companies and their agents. The GST Council's role is to frame tax policy, not to decide business terms."
The official further explained that insurers were fully aware of the implications of the exemption regime introduced under GST 2.0. "Once insurance products were made exempt, companies knew they would lose ITC eligibility. If margins are now under pressure, they will have to renegotiate terms with distributors rather than seek government intervention," the official added.
Industry Impact: Loss of ITC Raises Costs for Insurers
While the zero GST rate benefits customers marginally by making life and health insurance premiums cheaper, the withdrawal of input tax credit has led to higher operating costs for insurers.
Insurers can no longer claim ITC on services such as advertising, brokerage, or distribution, making these costs fully borne by the company. To compensate for the loss, several insurers have reduced agent commissions by up to 18%, and adjusted their internal margins to maintain profitability.
Industry insiders note that although policyholders are gaining from GST exemptions, the distribution network-comprising agents and brokers-is bearing the brunt of the change.
Background: GST 2.0 and the New Insurance Framework
Under the GST 2.0 overhaul, effective September 22, 2025, the GST Council exempted all individual life and health insurance policies from GST, reducing the earlier 18% rate to nil. The exemption, however, does not cover group insurance policies, such as employer-sponsored health or life insurance.
The change was introduced to make insurance products more affordable and encourage wider penetration. However, it also meant that insurers became ineligible to claim input tax credits on their expenses, resulting in a cascading cost effect.
Experts suggest that while the reform simplifies tax compliance for insurers and benefits consumers, it has unintended consequences for intermediaries, especially individual agents who rely heavily on commission-based income.
Looking Ahead
The Finance Ministry is unlikely to intervene, as officials maintain that commission structures are governed by business contracts, not tax law. Meanwhile, insurance agents continue to lobby for relief or regulatory guidance, arguing that reduced payouts could discourage new agents from joining the sector.
For now, the GST Council remains firm that the issue lies outside its mandate - reinforcing that policy exemptions under GST 2.0 have ripple effects that the industry must manage internally.
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