After demonetization, it is the other major announcement made by the government— GST or Goods and Services Tax Act. It will replace all the indirect taxes and will become effective from 1st July. It will replace the tax system in at least 17 states in India and will make taxation of goods and services far easier than the current system. As it will enable goods to be taxed only at the consumption point and not at manufacturing point, and thus, it will avoid double taxation.
Once GST is implemented, consumers will be able to save themselves from the burden of double taxation; which means, all taxes will be levied only at the time of purchase, including both the state and central government taxes. The government is expecting a boost to India’s economic growth as greater tax compliance would lead to more revenue.
This, ‘One Nation, One Tax’ scheme has become the hot topic of discussion as after all, there will be a rise in tax rates from 15% to 18% which will replace all the indirect taxes like service tax and VAT, in insurance sector.
It means, premium rates of both life and general insurance policies are set to increase after 1st July. In the case of life insurance plans, the effective service rate will depend on the type of the policy. While, service tax will be levied on the entire premium of term insurance plans, other policies like endowment, ULIPs, etc.; will attract tax on the charges only.
According to the GST rules, the value of service tax in relation to life insurance policies shall be as the following:
- The gross premium will be reduced by the amount allocated for investment on behalf of the policyholder
- If there are single premium annuity policies, 10% of single premium will be charged from the policyholder
- In other cases, GST will be applicable on 25% of the total premium paid in the first year and 12.5% of the premium in subsequent years.
- In case the entire premium amount is paid towards the risk cover, like term insurance, the GST of 18% will be charged on the entire premium.
Similarly, general insurance policies like health insurance plans, two-wheeler insurance policies, etc.; will become expensive with a hike in tax rate from 15% to 18%. (Source: The Economic Times)
What would be the impact?
Undeniably, there will be a rise in the premium rates. For instance, if the current premium of your two-wheeler insurance policy is Rs 1,500 (excluding the service tax), the GST impact will increase the premium including tax from Rs 1,725 to Rs 1,770. While comparing the premium at the time of buying any policy, make sure to look at premiums inclusive or exclusive of GST.
Should you buy any insurance policy after price hike or not?
Yes, it is necessary to buy insurance policy, even if there is a price appreciation. The purpose of insurance is to protect you and your loved ones in case of mishap, however, if you avoid buying the insurance just because of the price hike, you might have to endure more financial losses in case something goes wrong.
Imagine, you are riding a motorcycle when suddenly it collides with a scooter coming from the other side. Thankfully, there are no physical injuries, but your bike suffers major dent and thus, requires repairing. However, you don’t have any two-wheeler insurance policy, it means, you will have to bear the entire repair charges and there will be no one with whom you can share your expenses. You could have easily averted the situation, if you had a two-wheeler insurance policy that compensated you for financial losses or damages.
Moreover, with the increase in insurance premium rates, there will be a severe competition among insurers for giving the best insurance policies at affordable premium rates which will apparently prove useful for consumers. Along with the risk element, there are other expenses like policy issuance, commission, etc.; which could be lowered by insurance companies to compensate for the rise in service tax in the GST era.
Though, the premium is an important factor that should be considered while choosing the policy, it should not be the sole factor. There are other parameters, like claim settlement ratio, solvency ratio, coverage, support system, etc.; that should be considered before buying any insurance policy. Remember, premium in any case should not be the reason of depriving your family of financial protection which they might need when a mishap strikes.
Go with long-term insurance policies
Thanks to long-term insurance policies, you can keep yourself insured for two or three years in one go without going through the yearly policy renewal ordeal. For instance, if you have a long-term bike insurance policy, you don’t need to renew your policy every year and it will also help you save money. As premium rates are frozen for two or three years, any rise in service tax will not hamper long-term motorcycle insurance policyholders.
Also, the IRDAI has revised the third party premium rates for two-wheelers with effect from 1st April, 2017. Now the revised premium rate of engine capacity 75-150 cc is Rs 720. However, if you have a long-term two-wheeler insurance policy, you don’t need to fret over annual premium hike as your premium rates are locked for a longer period. Moreover, when you opt for a long-term two-wheeler insurance policy, the insurer saves on policy administration and issuance costs, which are then further passed on to policyholders in the form of low premium rates.
You might have already started getting messages from your insurance companies about the upcoming premium hikes. Irrespective of the type of insurance policy you are holding, you will have to bear the extra expenses. However, considering the benefits offered by insurance policies, all individuals should buy insurance regardless of what the final GST rate slab throws up.
As stated above, insurance is there to shield you against unforeseen situations, so don’t avoid it at any cost.