Impact of GST on Insurance and Banking

Monisha Chaudhary

30 Mar, 2024

Since it was introduced, the Goods and Services Tax, or GST, has generated a lot of debate in India. This is due to the fact that almost no industry in the country has been unaffected by the implementation of the GST and its changing rules. The Insurance and Banking Sectors would be even more expensive starting on July 1st, 2022, as a result of the GST rates being raised from 15% to 18%. The impact of the GST would be seen in the form of increased premiums, particularly for families purchasing health, life, and vehicle insurance.

GST on Banking Services

As per the goods and services tax, the GST rate for the banking services is imposed at 18%. Prior to the implementation of the GST, the banking services were imposed by the service tax, which was 15%. When comparing both the rates, there has been an increase of 3% in the taxes for the banking services. When the bank provides services to other banks, then in that case, the GST is charged; earlier, no service tax was charged on the interbank services. This has made the services between the banks expensive as compared to the earlier scenario. Different types of returns are now supposed to be filed by the banks to stay in compliance with the GST system, which has increased the cost compliance for banks.  

Input Tax Credit on Banking Services

ITC can be claimed when the financial institution or the banking company are engaged in the supply of the services. These services will include the services of providing advances, giving loans and deposits. When the input services or the inputs are for business purposes, and the taxes are paid on them, then in that case, the input tax credit can be claimed by such banking or financial company. Section 17 sub clause (5) of CGST Acts states that input tax credit cannot be availed from the account supplied as mentioned in the section. When there is an interstate transaction between the branches of the banks and the taxes are paid on the supplies, then ITC cannot be availed on the 50% restriction condition. When the bank branches supply services to each other, in that circumstance, the services are taxable, and they can also claim input tax credit.

Exemption of services of banking from GST

Following are the banking services which are exempted from GST:

• When the Reserve Bank of India¹ provides any kind of service, that service is exempted from the GST
• When services are of giving loans, deposits or advances, and the interest or discounts are the considerations, these services will be exempted from GST. Interests in credit card services are excluded from this.
• When the services are related to selling or purchasing foreign currency from authorized dealers or banks of foreign exchange, these services will be exempted from GST.
• When the services are given by a business correspondent or a facilitator of business to a banking or insurance company for the rural branch accounts, these services will be exempted from GST.
• Atal Pension Yojana services are also exempted from GST
• If the pension scheme is under the state government, then services provided by that scheme will be exempted from GST.
• When the total premium for insurance is paid by the state government, central government or the union territories, it will be exempted from GST.
• When a banking company provides services to Basic Saving Bank Deposit under the Pradhan Mantri Jan Dhan Yojana, GST is exempted.
• Services are provided to anybody for the transfer of up to Rs 2,000 in a single transaction using a credit card, debit card, or other payment card service by the acquiring bank.

GST on Insurance

Like any other services and goods in India, the goods and service taxes are also imposed on insurance and related services. There are three types of insurance:

1. Life insurance
2. Health insurance
3. General insurance

The GST on general insurance is levied at 18%. Insurances like fire, theft, marine, car, etc., are all included in the general insurance only.

Life insurance is further divided into three types: term insurance, unit-linked insurance plans and endowments.

When it comes to traditional life insurance, the goods and services tax is operated differently. This plan is often called an endowment plan.

Government Schemes that are exempted from GST for Insurance

• Varishtha Pension BimaYojana
• Pradhan Mantri Jeevan Jyoti BimaYojana
• Any other insurance scheme of the State Government as may be notified by the Government of India on the recommendation of GSTC.
• Pradhan Mantri Jan Dhan Yojana
• Janashree Bima Yojana
• Aam Aadmi Bima Yojana
• Pradhan Mantri Vaya Vandan Yojana
• Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum cover of Rs. 50,000
• Life insurance is given by the Central Government to members of the Navy, Army and Air Force.

Conclusion

It had been expected that the Indian economy would undergo significant change when the GST went into effect since it sought to assist businesses in being more efficient overall by streamlining tax compliance. However, the effect of the GST is clear-cut, with a 3% increase in the Indirect Tax levied on banking services. The impact of GST on the banking and insurance sector is both positive and negative. The banking and insurance industry will have a positive impact on GST in the near future.

Frequently Asked Questions

1. https://www.rbi.org.in/