How does GST impact your car insurance price?

Posted on: Nov 16, 2021 | 3 mins | Written by: HDFC ERGO Team

How does GST impact your car insurance price?

One of the biggest indirect tax reforms that India has witnessed was the introduction of Goods and Service Tax under the “One Nation, One Tax” stratagem. While the eventful journey of implementation of this new indirect tax in place of many old taxes was still not over, the pandemic happened. The world went into a series of global lockdowns followed by an economic slowdown. With many changes seen in the commercial front across nations in the past few years, what changed for good was the tax impact that the new tax regime has had on car insurance prices.

A brief introduction to GST

Before browsing through the impact caused by GST on car insurance prices, it is imperative to know how goods and services are classified and taxed under the one-tax system. As we are aware that the indirect taxes which were earlier taxed separately on goods and services got merged into one. Classifying and categorizing all the goods and services based on multiple tax rates was a thorny problem for the GST council.

To ease this process, goods and services were divided into four categories which were then decided to be taxed at four different rates - 5%, 12%, 18%, and 28%. Based upon the nature of a particular good or service, their tax rate was decided.

Change in rate of tax

The following table shows how the rate of indirect tax on car insurance premiums changed, by comparing the rates between pre and post-implementation of new tax regime:

Impact of GST on	Before New Tax Regime	After New Tax Regime
Car Insurance Price	Service Tax @ 15%	GST @ 18%

There is an adverse impact of GST on car insurance price as the buyers now have to pay an indirect tax of 18% on the premium. Earlier, under the service tax regime, the indirect tax component was only 15% of the premium. There is an additional impact of 3% more tax on insurance price.

Impact of GST on car insurance price

In simple terms, the effect of GST on car insurance premiums will be that the cost to the buyer shall go up. This is by virtue of a 3% increment in the rate of tax on the insurance policy premium. It has a three-fold impact which is discussed below.

● Higher GST: Before GST, the indirect tax was levied on insurance premiums by charging 14% service tax plus 0.5% Krishi Kalyan Cess and another 0.5% Swachh Bharat Cess. This accounted for 15% total tax, 3% lower compared to the current 18% GST.

● Higher premium: There is a direct cause and effect relationship between increased tax component and increased premium prices. As indirect tax is directly transferred to the ultimate consumer of goods or services, the buyer of the insurance policy shall bear the additional 3% tax levied via GST.

● Better features: Owing to the increased cost of insurance policy caused by GST, most insurance providers began to offer better services to their customers. With this, they have gained a competitive edge and can provide better coverage and services. With the increased cost of car insurance, companies are now offering various features such as better coverage, discounts, and excellent customer service.

A Practical Example

With the help of a practical example, we will evaluate the monetary impact GST has in the hands of policy buyers. For that, let us suppose that Mr. Ravishankar purchased a new car. For the overall protection of his new car, Ravishankar purchased comprehensive car insurance with a premium of ₹10,000.

In the following table, let us compute the monetary impact of the new tax regime compared to the old one.

Particulars	Old Regime - Service Tax	New Regime - GST
Insurance Premium	₹10,000	₹10,000
Tax Rate	15%	18%
Tax Component	₹1500	₹1800
Total Car Insurance Price	₹11,500	₹11,800
Incremental Cost	-	₹300

With the higher rate of rate under the GST regime, Mr. Ravishankar has to make an excess payment of ₹300. We can unambiguously conclude that GST has increased the car insurance price by 3% owing to the increased rate of indirect tax.

But let us not forget that buying car insurance comprising at least a third party cover is mandatory in India. Even though it may seem that one has to pay a higher premium for the insurance policy, think of the better facilities and services that one gets now, which were not available before.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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