In a recent development, the GST Council is gearing up to provide much-needed clarity on the input tax credit for life insurers, particularly in the context of a substantial demand of Rs 290 crore made on the Life Insurance Corporation (LIC). This forthcoming move is expected to bring relief to the state-owned insurance giant.
The complexity surrounding the Goods and Services Tax (GST) issue arises when dealing with traditional life insurance policies or endowment plans. In these cases, GST is levied on only a portion of the plan, leading to differential tax rates. For the first-year premiums, a GST rate of 4.5% applies, while for subsequent years, the rate reduces to 2.25%.
The reason for this variation lies in the dual nature of these policies. They consist of an insurance component, which attracts GST, and a savings component, which is akin to deposits or investments in banks and is therefore exempt from GST.
The crux of the issue pertains to the input tax credit claimed on the portion of the premium that is exempt from GST. Tax authorities argue that, since the premium itself is exempt, companies are not entitled to claim input tax credit.
This predicament has led to the application of a presumptive rate, where some tax officials believe that LIC should receive a lower credit than it has claimed, potentially requiring the reversal of some of the claimed credits.
At present, LIC, with multiple registrations across the country, has received a notice from GST authorities, and there is a concern that other insurers may follow suit in the coming months. Private players in the insurance industry could also face similar actions, prompting the government to address the issue at the GST Council level. While LIC's stock experienced a negative response following this disclosure, tax experts suggest that this initial notice is from the GST authorities in Bihar, and the payment process is expected to take time. The clarification process, however, may stretch over a few months.
In a filing with the stock exchange, LIC revealed that the notice in question pertains to a claim of Rs 167 crore, with an additional interest of Rs 107 crore and a penalty of approximately Rs 17 crore. The notice concerns the "non-reversal of the input tax credit availed and utilized on the item non-leviable to GST on the portion of the premium received by the corporation from the policyholder and the non-reversal of the input tax credit of the portion of the agent's commission on the item non-leviable to GST on the portion of the premium and the exempted policies."
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