The Unintended Cost of Affordability: Why GST Exemption on Insurance Premiums is Hurting Brokers

The government’s decision to exempt premiums on individual life and health insurance policies from the 18% Goods and Services Tax (GST) was hailed as a major win for consumers, intended to make essential insurance coverage more affordable. Effective September 22, 2025, this move immediately lowered the cost of buying a new policy.

However, a closer look at the cascading effects reveals a significant and unintended financial burden falling squarely on the shoulders of the very people who sell and distribute insurance: the agents, brokers, and intermediaries. Private insurance companies, facing a sudden surge in their operating costs due to the tax change, have swiftly moved to offset the loss by slashing distributor commissions by 15-18%.

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The Policy Shift: GST Exemption and the Loss of ITC

The crux of the issue lies in the fundamental mechanism of GST, specifically the Input Tax Credit (ITC) system.

1. Before the Change: When insurance premiums were taxed at 18% GST, insurance companies were allowed to claim ITC on the GST they paid for their business expenses. These expenses include commissions paid to agents, brokerage fees, office rent, IT services, and administrative costs. This ITC allowed the insurers to offset the tax paid on their inputs against the tax collected on their output (premiums), reducing their net tax liability.
2. After the Exemption: With individual insurance premiums now completely GST-exempt (Nil rate), the output service is no longer taxable. As per GST law, a company cannot claim ITC on inputs used to create an output that is exempt from tax.
3. The Cost Burden: The GST component previously claimed as ITC on core business costs (especially commissions, which account for a large portion of expense) now becomes an unrecoverable direct expense for the insurance company. This loss is estimated to increase the operating costs of private insurers by 2% to 3% of the premiums.

For an industry where managing expense ratios is paramount, this unrecoverable cost represents a significant hit to profitability.

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The Domino Effect: Commissions Get Cut

To neutralize this new, higher operating cost and maintain their margins, private insurance companies have targeted the largest variable expense: distribution payouts.

• Commission Reduction: Private insurers have reduced the commission payable to agents and brokers, effectively by 15-18%, starting from October 1, 2025.
• GST-Inclusive Payouts: The mechanism involves restructuring the commission as "inclusive of GST." For instance, if an insurer intended to pay a ₹1,000 commission, the new payment will be around ₹847 (₹1,000 / 1.18). This means the distributor is now financially bearing the 18% GST, which the insurer no longer recovers via ITC.

While public sector insurers like LIC and PSU general insurers are reportedly absorbing the ITC loss to pass the full benefit to policyholders, private players are under pressure to manage shareholder expectations and remain competitive.

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The Impact on the Ground: Viability Concerns for Intermediaries

The decision has created a financial crisis for the entire distribution network:

• Reduced Take-Home Pay: Agents and brokers, whose livelihood depends on these commissions, are seeing an immediate and substantial reduction in their take-home earnings.
• Viability of Small Operators: Industry bodies like the General Insurance Agents Federation Integrated (GIAFI) have warned that this cut severely impacts the working capital of smaller, independent agencies and advisors, many of whom may struggle to remain viable.
• Threat to Financial Inclusion: Agents are the backbone of insurance penetration, especially in Tier 2 and Tier 3 cities, where digital channels are less effective. A sharp drop in earnings could demotivate advisors, potentially shrinking the advisory network and running counter to the government's ambitious vision of "Insurance for All by 2047."

GIAFI President Prashant Mhatre has called for unity among agents and urged for a collective representation to the regulators, arguing that the tax reform, while benefiting consumers, has inadvertently undermined the distribution network that makes insurance accessible.

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Seeking a Balanced Solution

The insurance industry is currently in dialogue with the regulator (IRDAI) and the Finance Ministry to find a middle ground. The core challenge is balancing customer affordability (the goal of the GST exemption) with the operational sustainability of insurance companies and their distributors.

Finding a solution that protects the earnings of the essential distribution channel while continuing to make insurance affordable will be crucial for the sustained growth and outreach of the Indian insurance sector.