The upcoming GST scheme will be affecting a lot of financial services and this is due to new revised rate of 18 percent from the previous 15 percent being levied by the GST Council in its recent 14th meeting in the Srinagar. Although the differences are said to be marginally still there are various sectors, like banking, investments, insurance, real estate and mutual funds which are to be affected by the turmoil of GST.
If seen by each perspective, the impact of GST on the insurance will be three faceted as there are three significant insurance products in the market. Term insurance plans, Ulips, and Endowments (including money back) are those three but as the applicability in the current format of service tax upon their individual premium is not at all similar to them.
As known, the premium being paid upon the life insurance policies are the representation of two separate parts, which includes, savings and coverage of the losses. In which, the service tax is implied upon only the risk part of the insurance while leaving the savings factor aside. According to the upcoming GST rules & regulations, the value determined in the service tax part will be according to these mentioned factors:
- (a) The gross premium reduced by the amount allocated for investment, or savings on behalf of the policyholder.
- (b) In the case of single premium annuity policies, ten per cent of the single premium charged from the policyholder.
- (c) In all other cases, 25 percent of the premium in the first year and 12.5 cents of the premium in subsequent years. So, if the premium of an endowment plan is Rs 100, the GST of 18 percent will be applicable on the 25 percent of the premium i.e. on Rs 25, so, Rs 4.5 will be the GST amount.
- (d) If the entire premium paid by the policyholder is only towards the risk cover in life insurance such as in term insurance plans, the GST of 18 percent will be on the entire premium.
So, as per the findings, the impact of the GST will outnumber from the previous one as premium and GST will go hand in hand as per the endowment and term plans, due to the tax rate increase on the insurance part after the GST. Mathieu Verillaud, Chief Financial Officer, Bharti AXA General Insurance explained that, “In theory, this could mean an increase of 3% in premium from the existing applicable premium effective from 1st July 2017, across life, health and general insurance, however, some of this should be offset if tax on services availed by the industry are allowed to be taken into account to decrease insurers’ tax paid.”
Now, there comes a chance of input tax credit to relieve some burden over the policyholders if in case the insurance companies are allowed the take the benefits of ITC. Mr. Verillaud added that “his, unfortunately, is not clear as of yet given the complexity of the state/center structure of GST, this might drive some confusion as well as higher compliance and administrative costs for insurers. If these are not passed on to customers, prices might either go up or stay low but will affect the market’s solvency and financial health.” The same impact will be borne by the other insurance portfolio like health, cars and various other nonlife insurance which will be increased by 3 percent whenever replaced by the GST.
Coming to the real estate sector, it is clearly understood that the real estate sector is completely thrashed by the plethora of duties levied at every stage and both by state and central government. But now it is expected that the GST will take the place of real estate to a much better level and stable place. Rajeev Talwar, Chairman, NAREDCO clearly mentioned that “The heavily taxed real estate sector welcomes a single stable 12% GST rate, inclusive of the value of land and with full input tax credits.”
But when interrogated about the residential prices post GST scenario, Mr. Talwar stated that “NAREDCO is of the view that the actual tax incidence under GST would match or be lower than the existing multiple indirect taxes on the sector. The GST rate for work contracts which will also be offset by input credits will provide for a seamless and simplified tax policy.”
But the speculations are beyond the calculation at the current moment, mentioned Anuj Puri, chairman of JLL Residential who also added that “The GST rate is not the only important factor. The abatement rules as applicable under the service tax regime and the input tax credit facility for developers will determine if the effective tax incidence on real estate is lower or higher under GST.”
Mr. Puri explained in a good manner as to why there will be extra time taken by the experts to conclude the impact of GST on the real estate sector, in this regard he said that “Effectively, the composition scheme allowing for abatement against cost of land to the extent of 75% of the house cost for residential units priced under Rs 1 crore and less than 2000 sq. ft. makes the effective rate of 3.75%. In other cases, the abatement goes down to 70%, making the effective rate at 4%. This will go a long way in determining whether GST is tax neutral or tax adverse for real estate.”
Another personality, Surendra Hiranandani, Chairman & MD, House of Hiranandani mentioned that “In the case of a premium development, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil because of the taxes paid on other expenditures, having negligible impact.”
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He also cleared that the actual impact of the GST over the real estate sector is determined by upcoming provisions and sessions and added that, “More clarity will prevail once the GST gets implemented and the government clears its stand on the abatement available for the land cost for calculating service tax on under-construction projects”
After everything, discussing the banking sector and changes after the implementation of the GST, it is speculated that the transaction fees in the financial services are prone to increase as the government authorities decided to put this category into the 18 percent bracket. As simple as that the increased 3 percent over the services will compel the users to shell out 3 rupees more at every 100 rupees accountable.
At last, it now is known that the impact will anyhow change the scenario of this service but as speculated the impact will be minimal. On an average 1500 rupees will be an increase for an individual who is paying 50 thousand currently with no extra benefit but still the impact will be under the camouflage till the implementation of GST in real.
