Leading insurers see ITC impact from GST exemption as manageable, no major disruption

Leading insurance practitioners have indicated the overall impact of loss of input tax credit (ITC) under the GST exemption on life and health policies is far from disruptive, and that there is no real complication in implementing the ITC adjustment.

Insurers are already mandated under the IRDAI (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002, and the IRDAI (Expenses of Management of Insurers Transacting Life Insurance Business) Regulations, 2016, to prepare segmental, product-wise expense allocations and detailed revenue accounts.

These frameworks require insurers to classify expenses across linked and non-linked business, individual and group segments, and to submit granular allocations of management expenses to the regulator.

Mayank Mohanka, Founder Director at TaxAaram India, explained, “In practice, this existing mandate means that most insurers already have systems in place to trace policy-specific costs. Extending this segregation to GST simply means mapping those existing IRDAI-driven allocations into the GST ledger. For example, an expense like actuarial valuation or IT system cost already gets classified under linked or non-linked portfolios; insurers can now map that to taxable or exempt lines for GST purposes with minimal incremental effort. Thus, the additional compliance burden is limited, while the gain in retaining higher input credits is significant.”

Another senior official noted that the sharp reaction from some parts of the industry is not unexpected. “Some insurers may report pressure on margins, particularly those with a high share of retail health and life policies, which could affect quarterly earnings until product repricing and cost adjustments take effect,” he said.

Mohanka, echoing these views, added that smaller and retail-focused players are likely to feel the strain much earlier and may be forced to raise premiums. In contrast, large life and composite insurers, with diversified product portfolios and broader spreads of fee or revenue streams and reserves, have more room to absorb short-term margin shocks than smaller or single-product specialists.

“Therefore, such large insurance players with diversified product lines can cushion the impact of blocked ITC for some time and tweak their pricing strategy more gradually,” he said.

Another official further remarked, “In the long run, the consensus view is that the move will help expand the insurance market by making premiums more affordable for first-time buyers. Greater policyholder volumes could eventually compensate for the loss of ITC. But whether these benefits are fully preserved over time will depend on how insurers adjust base pricing, how much competition in the sector forces companies to pass on savings, and the extent to which regulators monitor compliance to ensure customers see the intended gains.”

The GST Council, on September 3, decided to exempt all individual life and health insurance products from tax effective September 22. While policyholders stand to benefit from lower costs, the exemption also comes with a trade-off: insurers will not be allowed to claim ITC on expenses linked to these exempted policies. These include commissions, brokerage, marketing, advertising, and vendor services.

Under the earlier system, insurers could offset such expenses against GST collections. With that benefit now unavailable, insurers may have to absorb the costs, raising questions about how this will affect profitability and whether the full GST savings will be passed on to customers.

While insurers largely agree that the move is a clear positive for policyholders, many may have initially been uncertain about how the ITC rules would apply. This is because the GST exemption covers only specific products and not the entire portfolio.

For general insurers, 18 per cent GST will continue to apply across all lines of business except individual health policies. For life insurers, the exemption applies only to individual life products, with GST still levied on annuities, group, and other segments.

Moreover, GST is calculated on the aggregate turnover of a company over a given period, not product by product. This may have left several insurers doubtful about how to account for exempt versus taxable business when applying the ITC rules.

Another industry official also pointed to a similar episode when the new surrender value norms were announced in December 2023. At that time, insurers pushed back strongly, arguing that the norms would hurt profitability and disrupt product structures, he said.

However, “by the time the rules came into force in September 2024, the sector had adjusted through repricing and operational changes, even though some losses had to be absorbed. Many in the sector believe that the same pattern will play out with the GST exemption: initial opposition and anxiety, followed by gradual acceptance and adaptation as the industry recalibrates,” he said.

There will be little impact, and even if there is, it will not last beyond September-October, the official added.