Team AckoJul 22, 2021
The genesis of the Goods and Service Tax (GST) began in 2000 when a committee was set up to design and formulate the policy on the new form of indirect tax. After due diligence, the GST Act was passed in April 2017 and is officially effective from 1 July 2017. The primary objective of GST is to unify several indirect tax regimes in India.
With the single form of the tax structure for sale of goods and services, it replaces as many as 17 central and state taxes. GST is also applicable to vehicle insurance and in this article, get to understand the impact of GST on car insurance.
Car insurance comes under the services category of the GST. Currently, the sale of goods and services is charged at fixed rates of 0%, 5%, 12%, 18% and 28% under the GST regime. As for the GST on car insurance in India, the rate is fixed at 18%. During the pre-GST era, the tax on car insurance in India was lower, below is a table for your understanding:
|Product Type||Pre-GST (Service Tax + Cess)||Rate After GST|
For vehicle insurance, the rate of tax has increased from 15% to 18%, a hike of 3% from the pre-GST times. The hike in the GST on four-wheeler insurance will be borne by the policyholder in the form a higher premium.
During the pre-GST era, there were several types of taxes on the sale of goods and services. This included Central Excise Duty, Interstate Sale of Goods (CST), Service Tax, Value Added Tax (VAT), Entry Tax, Luxury Tax, Purchase Tax, etc. With multiple indirect taxes, the government decided to levy a single or a unified system of collecting indirect taxes.
Hence, any tax being levied by the Centre or the State government on the supply of goods or services will be converted into GST. This unified tax regime is a dual charge where the Central Government will charge and collect Central GST (CGST) while the respective State Government levies and collects State GST (SGST) on the supply of goods and services between states. Also, the Central Government charges and collects the Integrated GST (IGST) on the exchange of goods and services between states.
There are different types of insurance plans available in the country. They are categorized as below:
This type of insurance is further classified into Term Insurance, Endowment Plans and Unit Linked Plans.
This type of insurance is further divided into Health Insurance, Car Insurance and Two-Wheeler Insurance.
The relationship between GST and Insurance is the premium and the Risk Factor component. While the premium is exempted from income tax, the Risk Factor is taxable as per the current taxation regime. Hence, the GST has increased the premium due to the increase in taxation by 3% i.e. from 15% of the previous taxation system to 18% as per the GST.
Car or vehicle insurance premium attracted 15% as Service Tax under the previous taxation system; however, as per the GST, it is at 18%. The effect of GST on car insurance is a hike of 3%. The increase in the tax for car insurance is borne by the policyholder by paying a higher premium.
With the increase in the car insurance premium, insurers are offering innovative features such as more effective coverage, discounts on online car insurance and excellent customer service. Several insurance providers also bank on their cashless garage facilities to offer the best customer service.
In conclusion, the GST on motor vehicle insurance has indeed increased the premium you pay for the insurance policy. That said, you cannot drive a car on Indian roads without a valid insurance policy. The insurance premium is not only criteria that you need to consider before buying car insurance, ensure you understand the benefits, terms and conditions and exclusions before you choose a plan which offers maximum protection at a competitive cost.
All goods and services offered to attract the GST in India. The car insurance premium is one of them. The pre-GST era had several indirect taxes such as sales tax, service tax, excise duty, and other state-specific taxes. Merging all these indirect taxes has led to the introduction of the GST, a single tax slab.
An insurance provider will pass on the GST on vehicle insurance premium to customers, and they will also take into consideration the administrative costs before fixing the premium for the insurance policy. Before GST was introduced, the service tax on car insurance premium was 15% (14% as service tax, 0.5% as Krishi Kalyan cess and 0.5% Swachh Bharat Cess); however, with the GST being implemented, the tax is 18% on car insurance premium. By increasing the tax, the premium on car insurance is bound to be higher compared to the pre-GST era.
Hence, the GST rate on vehicle insurance premium has increased the premium that you pay towards the car insurance policy.
With the implementation of the GST in car insurance policies, the immediate effect is the increase in the premium you pay towards the policy. Ensure you compare car insurance policies and choose the right Add-ons to get a low car insurance premium. Below table offers an insight into GST rates on different types of insurance policies:
|Type of Insurance Policy||Pre-GST Rate||GST Rate|
Prior to the GST being implemented against the exchange of goods and services, a service tax of 15% was levied on the premium you pay as a customer. This is not replaced by 18% as per GST, an increase of 3%. Below is an example:
|Car Insurance Premium||Pre-GST Rate||Service Tax||Total Premium|
|Car Insurance Premium||GST Rate||Service Tax||Total Premium|
The impact of GST on car insurance in the above example is an increase of Rs.300 compared to the pre-GST era taxation system. While this is an increase indeed, this difference should not deter you from protecting you from any monetary losses.
In conclusion, GST has increased the car insurance premium; however, protecting you from financial losses due to an accident is a wise choice. Also, Third-party liability policy is mandatory as per the Motor Vehicles Act. That said, the Third-party liability plan does not cover Own Damage. Hence, if you are looking for a complete cover for your vehicle, Comprehensive car insurance protects both you and the third-party.
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