Goods and Services Tax (“GST”) refers to a form of comprehensive indirect tax which aimed to unify the erstwhile complex and divided indirect tax regime of India. GST subsumed various indirect taxes and grouped them into a single, unified tax structure, making the indirect tax process much simpler for taxpayers.
The provisions for GST are envisaged in the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”), the Integrated Goods and Services Tax Act, 2017 (“IGST Act, 2017”) and similar State & Union Territory GST enactments.
As GST is levied on the supply of most goods and services, is it also levied on the services provided by Banking and Insurance sector. Prior to the introduction of GST, Service Tax was applicable on Banking and Insurance services at the rate of 15%. However, with effect from 01.07.2017, GST is levied on such services at the rate of 18%.
The increased rate of tax on Banking and Insurance services has significantly impacted the end users of such services; resulting in increased charges for Banking services and increased premiums for Life, Health, and Motor Insurance. This blog shall discuss and analyse the implications of GST on Banking and Insurance sector.
IMPLICATIONS OF GST ON BANKING AND INSURANCE SECTOR
I. INSURANCE SECTOR
Like all industries, the Insurance sector has been affected by the introduction of GST. Life, Health, and Motor Insurance policies have become costlier as taxes have increased by 3%, as the erstwhile Service Tax was levied at a rate of 15%, whereas GST is levied on such services at 18%.
Impact of GST on Insurance Premium
With the introduction of GST, the premium rates of Insurance policies have increased as they are largely affected by the enhanced rate of GST.
1. Life Insurance
Life Insurance policies are primarily of three types, namely; Term Insurance policies, Unit Linked Insurance plans (ULIPs) and Endowment policies. Before the implementation of GST, the premium paid on Term Insurance and ULIPs policies were subject to Service Tax at the rate of 15%. All these rates have now been replaced by GST, which is levied at the rate of 18%, indicating that the premiums for Life Insurance policies have become expensive with the introduction of GST.
Previously, Endowment plans attracted Service Tax at the rate of 3.75% on the premium in the first year of the policy, and the subsequent premiums at the rate of 1.88%. Under GST, the rate of tax levied has risen to 4.5% in the first year of policy, and 2.25% for the subsequent premiums paid. The Service Tax levied on Single Premium Annuity policies has also increased from 1.50% under the Service Tax regime, to 1.80% under the GST regime.
Value of supply: GST is levied on the supply of service of Life Insurance under a Life Insurance policy. Rule 32(4) of the Central Goods and Services Rules, 2017 (“CGST Rules, 2017”) stipulates the value of supply of service for Life Insurance business as under:
- The value of taxable supply shall be the gross premium per annum, minus the amount allocated for investment or savings where such amount is intimated to the policyholder at the time of supply of service.
- For Single Premium Annuity policies, the value of taxable supply shall be 10% of the premium.
- For all other Life Insurance policies, the value of taxable supply shall be 25% of the premium for the first year, and 12.5% of the premium in the subsequent years.
- Where the premium is for entire Life Insurance, i.e. a Term Life Insurance plan, then the value of the entire premium paid shall be the value of taxable supply.
Exemptions: The Central Government has notified certain Life Insurance services to be exempted from the applicability of GST under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which include:
- Annuity provided under the National Pension System, regulated by the Pension Fund Regulatory and Development Authority of India.
- Life Insurance services provided to the Defence in the form of Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air Form pursuant the Group Insurance Schemes of the Central Government.
- Life Insurance provided by the Employees’ State Insurance Corporation under Employees’ State Insurance Act, 1948.
- Services offered pursuant to the Insurance Regulatory and Development Authority of India Act, 1999 by the Insurance Regulatory and Development Authority of India (“IRDAI”) to insurers.
- Life Micro Insurance product approved by IRDAI with a maximum cover of Rs. 50,000.
- The Central Government may notify any other Insurance scheme of the State Government of India on the recommendation of GST Council.
Exemption from levy of GST are also granted to certain Life Insurance policies issued by the Central Government, which include:
- Janashree Bima Yojana (JBY)
- Senior Pension Insurance Scheme
- Aam Aadmi Bima Yojana (AABY)
- Pradhan Mantri Jan Dhan Yojana
- Pradhan Mantri Jeevan Jyoti Bima Yojana
- Pradhan Mantri Vaya Vandana Yojana
2. Health Insurance
Before GST, Service Tax was levied on Health Insurance premiums at a rate of 15%. However, GST levied on Health Insurance Premiums have also increased to 18%, increasing the overall cost of Health Insurance policies.
3. Motor Insurance
Motor Insurance is a mandatory insurance under the Motor Vehicles Act, 1988. Prior to the inculcation of GST, Service Tax was levied on the premium for both Car Insurance and Two-Wheeler Insurance, at a rate of 15%. With the implementation of GST, the rate of GST levied on motor insurance has increased to 18%.
4. General Insurance
The impact of GST can be seen on General Insurance sector as well, as it has increased the premium costs for policyholders. Car, Travel, Fire and other General Insurance policyholders are subject to GST at the rate of 18%, as compared to the erstwhile Service Tax which was levied at the rate of 15%.
Certain General Insurance policies are exempted from the applicability of GST, which include:
- National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana)
- Pilot Scheme on Seed Crop Insurance
- Hut Insurance Scheme
- Cattle Insurance under Swarnajayanti Gram Swarozgar Yojana
- Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, authorized by the Central Government and enforced by the Ministry of Agriculture; etc.
Input Tax Credit on Insurance services
Input tax credit (“ITC”) refers to the credit of GST provided to the supplier, on GST paid for the purchase of goods and services used for the furtherance of business, as inputs or raw materials for the supply of final goods/services.
ITC cannot be availed on General, Life and Health Insurance plans. Business policyholders who provide Health and Group Life Insurance to their employees are also not eligible to claim ITC.
In the case of RSWM Limited, Bhilwara (2021) 36 J. K. Jain’s GST & VR 316, the Advance Ruling Authority (“ARA”), Rajasthan decided upon the issue of whether the Applicant could claim ITC on GST levied by a Medical/Health Insurance company in respect of insurance provided to employees, which was made mandatory under Order No. 40-3/2020-DM-I(A) dated 15.04.2020 of the Ministry of Home Affairs.
The ARA observed that the Applicant was not a supplier related to Health Insurance service, neither was it a supplier of textile. Thus, the ARA held that the Applicant could not claim ITC on GST charged by the Medical/Health Insurance company in respect of Insurance provided to employees, as provided under Section 17(5)(b)(i) of the CGST Act, 2017.
II. BANKING SECTOR
Services offered by Banking companies were subject to 15% Service Tax under the erstwhile regime, which has now risen to 18% under GST. With the enhanced tax burdens, the final customers of such Banking companies have to bear the additional charges associated with Banking services, whereas Banking companies are also subjected to increased compliance and administrative requirements.
Registration Requirement: Before the implementation of GST, there was a centralized registration of all banks and other financial institutions under the Service Tax regime, irrespective of the state they operated in. With the introduction of GST, all banks and other financial institutions are required to register themselves separately for each state they operate in.
Exemptions: As banking companies provide a wide range of services to the customers, majority of such services fall under the ambit of GST. However, few banking services are exempted by the Central Government vide Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017 as follows:
- Services provided by the Reserve Bank of India.
- Service of providing deposits, loans or advances where the consideration is in the form of interest or discount, excluding interest involved in credit card services.
- Service of inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange, or amongst banks and such dealers.
- Service provided by a business facilitator or a business correspondent to a Banking company or Insurance company for its accounts in a rural area branch.
- Services provided by a banking company to Basic Saving Bank Deposit under Pradhan Mantri Jan Dhan Yojana.
- Services by the acquiring bank to any person for transfer of amount up to Rs. 2,000 in a single transaction done through credit card, debit card, or other payment card service.
- Services under Atal Pension Yojana.
- Services under any Pension Scheme of State Governments.
- Services provided by Central Government, State Government or Union Territory for any insurance for which total premium is paid by the Government.
Place of Supply: Section 12(2) of the IGST Act, 2017 stipulates the place of supply for services provided by Banking companies as:
- Place of supply shall be the location of service recipient, if such location is available in the records of the supplier.
- Place of supply shall be the location of the supplier, if the recipient’s location is not available in the records of the supplier.
- Section 13(8)(a) of the IGST Act, 2017 further provides the place of supply, in case of services provided by an Indian banking company to account holders outside India, as the location of the supplier.
Invoice Requirements: Rule 47 of the CGST Rules, 2017 require banking companies to issue tax invoices to customers within 45 days from the date of supply of Banking services. However, Rule 54(2) of the CGST Rules, 2017 stipulate that such tax invoice may be replaced by any other document in lieu of invoice, including consolidated statement, advice, invoice, etc generated at the end of the month.
A Bill of Supply shall be generated by banks for the provision of exempt supplies under Section 31(3)(c) of the CGST Act, 2017. This may be replaced by any other document in lieu of Bill of Supply, as per Rule 54 of the CGST Rules, 2017.
Inter-branch GST Implications: Before GST, banks were not subject to any tax for interstate transactions between two branches of the same bank. However, with the implementation of GST, the same is levied on transactions between two interstate branches of a bank.
ITC on Banking Services
Under the GST regime, a banking company or a financial institution consisting of a non-banking financial company engaged in the supply of services through acceptance of deposits, granting loans or giving advances are allowed to claim ITC under Section 17(4) of CGST Act, 2017.
ITC can be availed by such companies through the following methods:
- Reversal of credits related to exempt services as provided under Section 17(2) of the CGST Act, 2017.
- Availing 50% of the eligible ITC on inputs, capital goods and input services for the month, and lapse of the remaining ITC.
Rule 38 of CGST Rules, 2017 stipulates certain conditions for availing ITC on banking services as follows:
- A banking or financial company may claim ITC only on:
- Taxes paid on inputs and input services which are used for business purposes
- ITC cannot be claimed on account of supplies referred to in Section 17(5) of the CGST Act, 2017.
- The condition of 50% restriction on availing ITC is not applicable in case of tax paid on supplies made by one registered person to another registered person holding the same PAN, i.e., interstate transactions between branches of same bank.
- 50% of the balance amount of ITC is admissible and is to be furnished in Form GSTR-2.
With the implementation of the GST regime in India, it was anticipated that the Indian economy would be transformed, as it aimed to help small and large firms to increase their overall efficiency and simplify tax compliances.
However, the Banking and Insurance sector, which is subject to constant hurdles of managing IT systems to conduct business, managing client profiles, capturing data, ensuring compliance with the Reserve Bank of India’s norms, etc, are now required to ensure compliance with the GST system.
Compared to the erstwhile regime, the impact of GST is straightforward with a hike is of 3% on Indirect Tax imposed on Banking and Insurance services. All customers of Banking and Insurance sector are now subject to payment of higher insurance premiums and banking charges. Banking companies also face the additional hurdle of requiring to separately register in each state they operate in, which further enhances their compliance load.
Thus, the implications of GST on the Banking and Insurance sector has not yet proven favourable to the Indian economy, stakeholders involved or their final customers. The need of the hour is for the GST Council and the Central Government to take into account the detrimental impact of such enhanced rates of GST on the Indian economy at large, and suitably amend the GST rates applicable.
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