In the aftermath of the government's decision to completely remove 18% GST on retail life, health and accident insurance policies, several private insurers have reduced agent commissions by 18%, sparking backlash from distributors who say the move undercuts their livelihood and threatens the insurance outreach network.
Leading players like Niva Bupa, Care Health, and ICICI Lombard have reportedly revised their commission structures to make them GST-inclusive, effectively cutting the payout to agents and brokers. While insurers claim the step passes on full tax benefits to policyholders, industry bodies argue that it primarily aims to offset the loss from the non-availability of Input Tax Credit (ITC).
Loss of ITC Drives Commission Cuts
When insurance services attracted 18% GST, companies were eligible to claim ITC on various business inputs, including vendor services and administrative expenses. However, with the exemption on individual insurance policies, insurers are no longer eligible to claim ITC, a loss estimated between 2.2% to 2.7% of the total premium value.
According to industry estimates:
- In FY24, life insurers paid around Rs 24,000 crore in GST (after charging it from policyholders).
- They offset this with roughly Rs 14,000 crore in ITC.
- With the ITC benefit now gone, the net impact is a loss of nearly Rs 15,000 crore across the life insurance sector.
- Health insurers alone could lose about Rs 1,800 crore annually, pushing the total industry hit to around Rs 15,000 crore.
As a result, insurers have trimmed agent and distributor commissions - which typically account for 15-20% of the Rs 40,000-Rs 50,000 crore retail insurance market - to manage the shortfall. A commission that earlier stood at Rs 1,000 now amounts to roughly Rs 847, marking a significant 18% reduction.
Agents' Body Questions Move
The General Insurance Agents Federation Integrated (GIAFI) has publicly questioned the insurers' decision, calling it "detrimental to insurance distribution".
According to the federation's president, the GST exemption has caused an immediate loss of ITC for distributors as well. Earlier, agents could claim ITC on commissions, incentives, and business expenses, but with the exemption in place, these credits are no longer available.
"This is not a small change. It directly impacts the working capital of agencies, brokerages, and individual advisors. Many small and independent operators will struggle to stay viable," said the GIAFI president in a statement.
He added that in some cases, insurers are now requiring distributors to pay GST from their commissions, effectively cutting take-home pay by nearly 18%.
"The burden is now falling on distributors. This severely affects our income and reduces our ability to sustain and expand our business," he warned, adding that such decisions could slow insurance penetration in smaller towns and rural India.
"Insurance for All by 2047" at Risk
The agents' federation also cautioned that this trend could undermine the government's 'Insurance for All by 2047' goal, as lower commissions may discourage new entrants and reduce sales efforts in underinsured regions.
"If our earnings are cut, motivation will fall, and access to insurance will shrink. This goes against the vision of universal coverage," the statement noted.
GIAFI has urged all life, general, and health insurance distributors to unite and raise the issue with the Insurance Regulatory and Development Authority of India (IRDAI) and the Finance Ministry, warning that similar commission cuts could soon extend across the sector.
"Our role is essential, not expendable. If such policies continue unchecked, they could cripple India's insurance distribution backbone," the federation said.
Balancing Affordability and Viability
The current debate places the spotlight on policymakers and regulators to balance affordability for policyholders with financial viability for distributors. While insurers defend their move as an effort to pass tax relief directly to customers, agents insist that the burden of tax policy shifts should not fall on the distribution network that drives insurance penetration across India.
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