Insurance stocks were in heavy demand on Thursday, after the GST Council, comprising the Union Finance Minister, Nirmala Sitharaman, and finance ministers from the Centre and states, on Wednesday approved to make GST a two-tier structure of 5 and 18 per cent, with a special rate of 40 per cent on tobacco and related products and ultra-luxury items.
The new rates will be effective September 22. The tax brackets of 12 and 28 per cent have been done away with.
One of the many outstanding decisions of the rationalisation is that GST has been exempted on individual life insurance, including term, ULIP, and endowment plans and reinsurance services. Currently, premium payment on such policies attracts an 18 per cent tax.
Expectedly, insurance stocks soared on Thursday, with Star Health and Allied Insurance Company surging over 9 per cent, Niva Bupa Health Insurance Company zoomed 9 per cent, ICICI Prudential Life Insurance Company jumped 5.70 per cent, ICICI Lombard General Insurance Company rallied 5 per cent, Life Insurance Corporation of India climbed 5 per cent, HDFC Life Insurance Company went up 4.90 per cent and SBI Life Insurance Company surged 4.88 per cent on the BSE.
Also Read: New GST regime from Sept 22: 5pc, 18pc continue; 40pc on luxury
Insurance industry commends Centre rollout
It’s not just consumers, but also banks, auto, cement, healthcare and insurance sectors that are set to prosper with the new rules.
“While the direct beneficiaries include consumer, auto, cement, healthcare and insurance sectors, the second order beneficiaries in terms of growth will be retail banks & NBFCs,” said Rahul Singh, CIO-Equities, Tata Asset Management.
All individual health insurance policies, including family floater policies and policies for senior citizens and reinsurance thereof will also be exempt from GST.
"We will make sure that companies pass on GST rate reduction and make insurance affordable for the common man and increase the insurance coverage in the country," he said.
Pranav Haridasan, MD and CEO, Axis Securities, elaborated upon some of the key sectors that stand to benefit from this, including insurance, FMCG, automobiles, agriculture equipment, cement, consumer durables, apparel, footwear, QSR, and retail.
The challenge: Reversing ITC
However, life and health insurance firms will have to reverse the Input Tax Credit (ITC) accumulated till September 21, 2025, after the GST exemption kicks in, raising cost burden on companies, according to tax experts.
The finance ministry in a set of FAQs issued after the 56th GST Council meeting on Wednesday, said businesses whose outward supply has been exempted after the GST rate rationalisation will have to reverse their ITC which is accumulated in their ledger.
The accumulated ITC can be utilised only to discharge outward liability for supplies of goods/services, or both, made till September 21, 2025, the ministry said.
"However, for supplies made on or after i.e 22nd September, 2025 when the rate change is effected, ITC will have to be reversed as per provisions of CGST Act, 2017," it said in the FAQ.
AMRG & Associates Senior Partner, Rajat Mohan, said segregation of credit complex will be a complex process.
“In practice, insurance companies deal with a large volume of common input services – such as IT platforms, professional services, and branch operations – which makes segregation of credit complex. A sudden requirement to reverse the entire pool of unutilised credit without any refund mechanism will be a financial setback for the sector,” he said.
Mohan said the government may consider a phased reversal of the ITC.
"To strike a balance between consumer interest and industry sustainability, the government may consider a phased reversal or a limited refund window for credit legitimately earned before the exemption date," he added.
Nangia Andersen LLP Partner-Indirect Tax, Rahul Shekhar, agreed that companies must be ready to reverse ITC and ring-fence credits to stay compliant.
“The most important clarification required by the industry is part of the FAQ regarding treatment of exempt supplies post-GST rate change,” he added.
Mohan further said, "While policyholders will directly benefit from zero tax on premiums, insurers will be required to reverse the ITC accumulated till 21st September, 2025. This reversal obligation effectively converts legitimate credits, accrued when insurance was a taxable supply, into a cost burden for insurers."
Deloitte India Partner & Indirect Tax Leader, Mahesh Jaising, said as per the FAQ, ITC accumulated at higher rates can continue to be utilised, but ITC relating to supplies that become exempt must be reversed proportionately from September 22.
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