How will GST Impact your Motor Insurance Premium?
The GST bill, which rolled out from July 1st, 2017 can be counted as the single biggest financial reform the nation has seen since its Independence. The changes are made in tax structure in state and center. Basically, GST seeks to improvise on VAT and remove the effect of double taxation from the goods and services price below the value chain.
The latest GST under the updated GST structure is 18% on insurance policies. Well, this is not good news for policyholders. In the GST regime, motor, health, life insurance would be more expensive, as taxes are increased.
How the motor insurance industry is impacted by GST?
To answer the above question, yes; the motor insurance industry has been impacted by GST. The industry had earlier attracted a service tax of 15%. This has increased to 18% from July 2017. The GST makes purchasing of insurance a bit expensive.
This also calls for an adjustment from the insurer end so that compliance can be met at all times with regards to financial accounting, getting GST registration, updating bookkeeping, and knowing about the nitty-gritty such as input tax credit. For a car owner the GST impact on car insurance is marginal and will entail an increase of 3% on taxes for the policy purchased.
On a positive note, the cross border double taxation and compliance issues has been ironed out as a nation-wide one tax regime making things simpler on an operational level for the insurance companies.
The GST impact on third party insurance premium has seen a rise of 3% in-line with the change in taxation system for overall general insurance. This is a cost that will be borne by the final customers in the form of an increased premium amount.
The GST impact on comprehensive insurance policy too increases from 15% to 18% from July 1, 2017. As a result, a car owner opting to go for comprehensive coverage now bears the additional 3% tax increase from his own pocket.
Read More on Impact of GST on Indian Auto Industry.
Let us now see the impact GST has on customers and on the insurance companies.
How GST impacts the customers?
The Indian insurance industry is currently going through a temporary phase of adjusting to the GST impact on car insurance. Earlier, the policyholder used to pay service tax on the premium. This has been replaced by a GST of 18%.
For example, if Paul was paying a premium of Rs. 10,000 with a service tax of Rs. 1,500 earlier he was paying in total Rs. 11,500. Under the new regime, Paul is now paying Rs. 11,800 – an impact of Rs. 300 more.
However this marginal increase in taxes shouldn’t be a deterrent for a car owner to not take coverage. The value car insurance offers, outweighs the costs or increase in taxes. Hence, it still remains mandatory for car owners to go for life insurance policy coverage.
Also since the Motor Vehicles Act 1988 still requires every single car and bike to be insured, there won’t be any change from a legal standpoint. Even after the GST rollout, and irrespective of whether the insurance policy premium rates have increased or decreased, the car owner or bike owner will have to compulsorily go for an insurance policy.
How GST impacts the Insurers?
Initially, it was a problem for insurance companies. But once the payments, invoicing, and taxation policies have been restructured it will be smooth sailing, as GST is an objective based tax and it is collected by states where goods and services are consumed. Hence, the insurance companies need to divide their services and invoice to their customer based on the location where the services were used.
GST requires the reform of administration and accounting in Income Tax systems, to maintain the financial records of each state individually and as per compliance.
After GST implementation, the insurance companies have had to make amendments, for the renewed transaction handling, operations, registrations, and information system, because the GST execution demands reform of these elements in their entirety.
Let us know how your motor insurance premium has changed after rollout? We will be interested to hear from you.