Understanding and Justifying the Implementation of 18% GST on Insurance Premiums in India

To address the concerns immediately, let's clarify that the tax on insurance premiums is levied on the insurance portion, which is the cost to cover mortality risk, rather than the entire premium amount. A premium is comprised of two parts: the cost to cover mortality (which is often low) and the investment component that yields the maturity benefit.

For instance, if your premium amount is 100 rupees, with the investment part being 70 and the insurance part 30, the GST would be 18% of 30 rupees, or 5.4 rupees. Term insurance works similarly, with this proportion varying across different insurance plans. However, in general, the cost of mortality is relatively low, meaning that the increase is not as significant as it may initially appear.

Nonetheless, despite this, policyholders will experience an increase in premium amounts if the rates increase. So, how is this decision to implement an 18% GST on insurance premiums justified?

Justification of the Decision: Government Insurance Schemes Exemption

The government of India has taken steps to exempt certain insurance schemes such as the Aam Aadmi Bima Yojana (AABY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), and Pradhan Mantri Vaya Vandana Yojana (PMVVY). These schemes are designed to shield the most vulnerable sections of society who may find it difficult to afford even this minor increase in premium amounts.

This measure ensures that financial security remains accessible to those who need it most. Insurance is an essential service industry whose health is crucial for the broader economy, as many economic activities depend on it.

Impact on Insurance Density and Tax Structure

The primary reason for implementing this measure was to address the low insurance density in India compared to global levels. Insurance density is defined as the ratio of premium written to the total population. By harmonizing tax levies across the insurance sector and reducing compliance costs, the government aims to foster greater insurance penetration. Lowering compliance costs incentivizes insurance providers to expand their access, leading to a diverse range of attractive and more accessible plans.

While it may seem foolish to measure the impact in the short run, the long-term effects are anticipated to be positive. Reducing compliance costs will drive insurance providers to increase their market penetration, thereby making financial security more accessible to a wider population. Additionally, these measures will offset the effects of inflation in the long run, as the reduced costs start to take effect.

Overall Benefits and the Middle Class

The implementation of 18% GST on insurance premiums has brought relief to the insurance industry, which was previously burdened by varying and sometimes incoherent tax structures. For the long term, this move not only increases insurance penetration but also protects the financially vulnerable sections of society.

While the middle class will bear the brunt of these changes as they strive to support the economy, it is a necessary step to foster a more inclusive financial system. The middle class has always played a crucial role in the growth and development of India, and their resilience is crucial to achieve this goal.

In conclusion, the implementation of 18% GST on insurance premiums in India is a strategic move aimed at enhancing insurance penetration, improving tax compliance, and protecting the financially vulnerable sections of society. While it may present challenges, the long-term benefits outweigh the short-term inconveniences.