Before I start, let me clear something.
I whole-heartedly believe that GST on items like insurance should not exist. Among many other things :)
Yet, the issue is not black and white.
Let’s see the numbers –
Suppose your insurance premium is Rs 100. Currently, you are paying GST of Rs 18. The total insurance premium going from your pocket is Rs 118.
If insurance becomes exempted from GST, it is natural to assume that the final insurance premium going from your pocket will now be Rs 100.
Right?
But that’s not how it works.
How does GST mechanism work? (Skip this part if you are familiar with the basics of GST)
The insurer collects GST from you (the insured) at 18% and is supposed to deposit it with the Government.
But, the insurer also incurs his own expenses. Rent for running their office, travelling, telephones and other expenses. Expenses on which the insurer pays GST.
In GST terms, it is also called “input tax credit”
While depositing the GST the insurer collected from you with the Government, the insurer reduce the input tax credit.
Suppose, the insurer collects the GST from you of Rs 18. He doesn’t have to deposit the full Rs 18 with the Government. If he has paid, say Rs 10 of eligible GST on his own purchases and expenses, the insurer only deposits the net Rs 8 (18-10).
So, in a way, the insurer is only depositing Rs 8.
What will happen now if GST becomes exempt?
The insurer will not be needing to collect and deposit the Rs 18 from you.
That is clear.
But it also opens up another problem.
The insurer cannot claim the Rs 10 worth of GST input tax credit.
This means that the insurer is bearing that Rs 10 from his own pocket.
And he will not be eligible for a refund of the Rs 10, as per current laws.
Even if he is made eligible by a change in law, he will have to jump through hoops and wait for years to get this refund.
You know how the GST department works for refunds :)
So, effectively, the costs for the insurer have increased – because the Government exempted GST on insurance!
Now, that their costs have gone up, where will they recover it from?
Of course, you and me.
That means higher insurance premiums.
As per Macquarie Capital’s research, insurance companies will have to hike prices between 6-10%!
While, you, the end user is still paying lesser than before, it also starts up another problem.
In an ideal world, yes, all insurers would have hiked prices by the additional costs.
And we would have lived happily ever after.
But we do not live in an ideal world.
Competition.
In order to capture the market and sell more policies, some insurers with deeper pockets can absorb the blow… for some time.
Some may lose out on business, some may go out of business. Some may merge to stay afloat.
Eventually, over a period of few years, a cartel can emerge.
And the end loser will be… no prizes for guessing… YOU!
Does this remind you of any other sector which went through this recently? ;)
Yes, the telecom sector. How Jio came and disrupted, many went of business, others merged. While they increased geographical coverage, the overall service quality went down.
And now all of them are slowly hiking prices as a cartel.
Who is suffering? You and me!
The insurance sector is definitely going to undergo a massive change beneath the cracks.
In taxation, nothing is free. The government may exempt GST, but the market always finds a way to collect its dues.
And more often than not, you and I end up paying the price.
Do you think insurance is headed down the same route as telecom?
Hit reply or email me at [email protected] for more feedback.
Thank you.
And for all those with a mission in life,
VijayBhava!