Insuring Compliance: Decoding GST on Insurance and Agent Services in India
The Goods and Services Tax (GST) regime, since its inception in 2017, has significantly transformed India's indirect tax landscape. While aiming for simplification and transparency, its application across diverse sectors often presents complexities. The insurance sector, a cornerstone of financial stability and risk management, is no exception. Understanding the nuances of GST as it applies to various insurance products and the services rendered by insurance agents is crucial for both insurers and policyholders to ensure compliance and avoid pitfalls.
GST on Insurance Services: The Core Principles
Under the GST regime, insurance services are treated as a 'supply of services' and are generally taxable. The standard rate of GST applicable to most insurance services is 18%. This rate is specified under Notification No. 11/2017-Central Tax (Rate) [S.No. 15(vi)]. However, the valuation of these services, particularly for life insurance, and certain exemptions, introduce layers of complexity.
Valuation of Life Insurance Services: Rule 32(4) Dissected
One of the most critical aspects of GST on life insurance is the determination of the 'value of supply'. Rule 32(4) of the CGST Rules, 2017, provides specific methodologies for this, departing from the general transaction value rule. This rule aims to tax only the service component and not the investment portion of a life insurance premium.
The value of supply of services in relation to life insurance business is determined as follows:
(a) Premium less Investment/Savings: If the gross premium charged from a policyholder is reduced by the amount allocated for investment or savings on behalf of the policyholder, and this amount is explicitly intimated to the policyholder at the time of supply of service, then the taxable value is the gross premium less the investment/savings portion. This method ensures that only the risk cover and administrative charges are subject to GST.
(b) Single Premium Annuity Policies (other than (a)): For single premium annuity policies where the investment component is not separately intimated, the value of supply is fixed at ten per cent. of the single premium charged from the policyholder. This provides a simplified valuation for a specific category of policies.
(c) All Other Cases: In all other life insurance cases not covered by (a) or (b), a deemed valuation mechanism applies:
For the first year, the value of supply is twenty-five per cent. of the premium charged from the policy holder.
For subsequent years, the value of supply is twelve and a half per cent. of the premium charged from the policyholder. This method essentially taxes a fixed percentage of the premium, acknowledging that the service component is higher in the initial years.
Important Proviso: It is crucial to note that "nothing contained in this sub-rule shall apply where the entire premium paid by the policy holder is only towards the risk cover in life insurance." This means pure term insurance policies, where there is no investment or savings component, are taxed on the full premium amount, as the entire premium represents consideration for the risk cover service.
Exemptions and Specific Schemes
While the general rule is taxation, certain insurance services are exempt from GST to promote social welfare and financial inclusion. Notification No. 12/2017-Central Tax (Rate) outlines these exemptions:
Social Security Schemes (S.No. 35 & 36): Services by way of life insurance business provided under various government-backed schemes like Pradhan Mantri Jan Dhan Yojana (PMJDY), Varishtha Pension Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, Aam Aadmi Bima Yojana, and any other notified State Government insurance scheme, are exempt from GST. Similarly, general insurance business under Aam Aadmi Bima Yojana, Pradhan Mantri Jan Dhan Yojana, and other notified State Government schemes are also exempt.
Specific General Insurance Schemes (S.No. 36A): Services by way of general insurance business provided under the "Bangla Shasya Bima" scheme are specifically exempt.
Re-insurance of Exempted Schemes (S.No. 39 & 40): Services by way of re-insurance of an exempted insurance scheme, as referred to in S.No. 35, 36, or 36A, are also exempt. This ensures that the exemption flows through the re-insurance chain.
Other entries in Notification No. 12/2017-CT(Rate) (S.No. 28, 29, 29A, 29B, 30) relate to other financial services or specific pension schemes and are not directly applicable to general insurance services.
GST on Insurance Agent Services: The Reverse Charge Mechanism (RCM)
A significant aspect of GST on insurance agent services is the application of the Reverse Charge Mechanism (RCM). As per S.No. 7 of Notification No. 13/2017-Central Tax (Rate), dated 28th June, 2017, as amended, services supplied by an insurance agent to any person carrying on insurance business are covered under RCM. This means that the insurance company (recipient of service), and not the insurance agent (supplier of service), is liable to pay GST on the commission paid to the agent.
Consolidated Invoice for Commission Payments (FAQ 67): To ease compliance, the insurance company may issue agent-wise consolidated invoices at the end of the month for the supply of services received during the month. This streamlines the RCM compliance for insurers.
Key Operational Aspects and Clarifications
The CBIC has issued several circulars and FAQs to clarify various operational aspects of GST in the insurance sector.
Location of Supplier for Fund Management Charges in ULIP Policies : Fund management charges are levied for managing and administering the fund in ULIPs. The location of the supplier of service for these charges is the location/office which manages the fund. This is crucial for determining the place of supply and the appropriate GST (CGST/SGST or IGST).
Export of Services for NRI Policies : The question of whether insurance policies issued to Non-Resident Indians (NRIs) constitute "export of services" is critical for taxability. As per Section 2(6) of the IGST Act, 2017, for a service to qualify as an export, the payment must be received in convertible foreign exchange. FAQ 68 clarifies that if the premium is paid through a Non-Resident External (NRE) Bank account, it is considered paid in Indian Rupees and not in convertible foreign exchange. Therefore, such services do not satisfy the conditions for export of services and are treated as inter-State supplies, subject to IGST. Consequently, the requirements of a Letter of Undertaking (LUT) or Bond, as per Section 16(3) of the IGST Act, 2017, read with Rule 96A of the CGST Rules, 2017, would be required only if the conditions of export of services are genuinely satisfied .
Time of Supply of Life Insurance Services : Determining the 'time of supply' is essential for timely GST payment. For life insurance services, the time of supply is clarified as follows:
New Policy: At the time of issuance of the policy.
Renewal of Policy: At the time of issuance of the renewal notice for insurance premium.
Other Charges (including ULIP charges): At the time of levy or recovery of the charges from the policyholder.
Service Tax Refund : Section 142(5) of the CGST Act, 2017, specifically provides for refund of service tax paid under the Finance Act, 1994, in respect of services not provided. Such claims are to be disposed of in accordance with the provisions of Chapter V of the Finance Act, 1994.
Krishi Kalyan Cess (KKC) Input Tax Credit : It is explicitly clarified that input tax credit of Krishi Kalyan Cess cannot be carried forward, as it is not permitted in terms of Section 140(1) of the CGST Act, 2017, read with Rule 117(1) of the CGST Rules, 2017.
Place of Supply for Group Insurance Policies : In the case of group insurance policies where a Master Policy is issued to a registered person, and the premium is a single premium not segregated based on beneficiaries located in different states, the place of supply for such a policy will be the location of the registered person paying the premium.
Time of Supply for Deposits and Advances : As per the proviso to Section 2(31) of the CGST Act, 2017, a deposit given for the supply of goods or services is not considered payment unless the supplier applies it as consideration. However, for advances, the time of supply is the time of receipt of the advance, as provided in Section 13(2)(a) of the CGST Act, 2017.
Re-insurance Services : The service of re-insurance falls within the scope of 'supply' and is therefore chargeable to GST, unless specifically exempted (as seen in S.No. 39 & 40 of Notification No. 12/2017-CT(Rate) for re-insurance of exempted schemes).
Input Tax Credit (ITC) Provisions: Section 17 of CGST Act
The availability of Input Tax Credit (ITC) is a critical aspect for insurance companies, as it allows them to offset their output GST liability with the GST paid on their inward supplies. However, Section 17(5) of the CGST Act, 2017, imposes certain restrictions on ITC.
General Restrictions (Section 17(5)(a) & (aa)): ITC is generally blocked for motor vehicles for transportation of persons with a seating capacity of up to thirteen persons (including the driver), vessels, and aircraft, except when used for specific purposes like further supply, transportation of passengers, or imparting training.
Services Related to Blocked Categories (Section 17(5)(ab)): Services of general insurance, servicing, repair, and maintenance related to these blocked motor vehicles, vessels, or aircraft are also generally blocked. However, ITC is available in the following scenarios:
Where the motor vehicles, vessels, or aircraft are used for the purposes specified in clauses (a) or (aa) (e.g., for further supply or passenger transport).
Where received by a taxable person engaged in the manufacture of such motor vehicles, vessels, or aircraft.
Crucially for insurers: Where received by a taxable person engaged in the supply of general insurance services in respect of such motor vehicles, vessels, or aircraft insured by him. This specific provision allows insurance companies to claim ITC on general insurance, servicing, repair, and maintenance of vehicles they insure, which is essential for their business operations.
Specific Blocked Services (Section 17(5)(b)): ITC is generally blocked for certain categories of goods or services, including:
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery.
Leasing, renting, or hiring of motor vehicles, vessels, or aircraft (except when used for specified purposes).
Life insurance and health insurance. This means an entity generally cannot claim ITC on life and health insurance premiums paid for its employees or for general business purposes.
Provisos to Section 17(5)(b): There are important exceptions to these blocks:
Outward Supply of Same Category: ITC is available where an inward supply of such goods or services is used by a registered person for making an outward taxable supply of the same category of goods or services, or as an element of a taxable composite or mixed supply. For example, an insurance company providing life insurance services can claim ITC on life insurance services it procures as an inward supply (e.g., re-insurance of life insurance).
Obligatory under Law: ITC is available where it is obligatory for an employer to provide such goods or services to its employees under any law for the time being in force. For instance, if a specific law mandates an employer to provide health insurance to its employees, the ITC on such health insurance premiums may be claimed.
ITC on Motor Garage Services for Claim Settlement : It is clarified that ITC will be allowed on services of motor garage used by an insurance company for claim settlement. This aligns with the business nature of general insurance companies.
Conclusion
The GST framework for the insurance sector is multifaceted, designed to capture the value addition at various stages while also providing exemptions for socially beneficial schemes. From the specific valuation rules for life insurance premiums to the reverse charge mechanism for agent commissions, and the nuanced provisions for input tax credit, understanding these regulations is paramount. Insurers must meticulously apply Rule 32(4) for valuation, comply with RCM obligations, and carefully assess ITC eligibility under Section 17(5) to ensure seamless operations and avoid potential disputes.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.