The Hidden Cost of GST on Insurance Renewals: Are Policyholders Paying Unnecessarily?

In India, insurance is not just a financial product; it's a necessity. Whether it’s health, life, or vehicle insurance, most people purchase policies to protect themselves and their assets against unforeseen circumstances. However, what many policyholders may not realize is the additional cost they incur each year in the form of Goods and Services Tax (GST) on insurance renewals. The Indian government charges an 18% GST on the renewal of insurance policies, a fee that is collected irrespective of whether a single claim has been made against the policy. This practice, particularly in the case of third-party vehicle insurance, raises significant questions about fairness and financial justice.

The Nature of Insurance: An Agreement, Not a Service

As discussed, an insurance policy is essentially an agreement between the policyholder and the insurer. It outlines the terms under which the insurer will provide financial protection or compensation in exchange for premium payments. This agreement ensures that the insurer will step in with financial support if a covered event—such as an accident, illness, or damage—occurs. Until such an event takes place, the service aspect of the insurance remains dormant, existing only as a promise or potential.

This distinction is critical because it highlights the fact that policyholders are not continually receiving a service from the insurer in the way one might receive ongoing services from a subscription-based business. Instead, they are paying for the assurance that the service will be available if and when it is needed. 

GST on Insurance: A Question of Fairness

Despite the fact that the actual service (such as a payout or financial support) only comes into effect when a claim is made, the Indian government charges an 18% GST on the renewal of insurance policies every year. This tax is applied universally, whether or not the policyholder has ever made a claim. For many policyholders, particularly those who purchase mandatory third-party vehicle insurance, this means paying an extra 18% on top of their premium every year, even if they have never used the insurance service they’ve paid for.

For example, consider a policyholder who renews their third-party vehicle insurance annually without making any claims. Every year, they pay a premium along with an additional 18% GST. Over the years, this adds up to a significant amount of money paid in taxes for a service they have never accessed. This practice raises several important questions:

- Why should policyholders pay a service tax on a service that they have not used?

- Is it justifiable for the government to charge GST on an agreement that may never result in an actual service being provided?

- Are policyholders being unfairly burdened by a tax that seems to penalize them for being cautious or lucky enough not to need to make a claim?

The Impact on Third-Party Vehicle Insurance Holders

The issue is particularly concerning for holders of third-party vehicle insurance policies. In India, third-party insurance is mandatory for all vehicles, and it provides coverage against damage caused to a third party in an accident. However, unlike comprehensive insurance, third-party insurance does not cover damages to the policyholder’s own vehicle or person. This means that the likelihood of not making a claim is relatively high, especially for cautious drivers.

Yet, every year, these drivers are required to renew their insurance and pay the 18% GST, even though the service they are paying for may never be used. This can be seen as a form of double taxation—first, on the mandatory premium and then on the renewal of a policy that, statistically speaking, is less likely to result in a claim.

The Way Forward: Rethinking GST on Insurance Renewals

It’s time for a broader conversation about the fairness of charging GST on insurance renewals, especially for policies like third-party vehicle insurance. Policyholders deserve to understand why they are being taxed on a service that remains dormant unless a specific event occurs. 

Moreover, there is a need for policy reform that considers the nature of insurance as an agreement rather than a continual service. One possible solution could be the introduction of a tiered GST system where the tax is adjusted based on whether a claim has been made which, in turn, could ease the financial burden on policyholders, making insurance more affordable and fairer.

Conclusion: Awareness and Advocacy

As policyholders, it’s crucial to be aware of where our money is going and to question the fairness of certain financial practices. The 18% GST on insurance renewals may seem like a minor detail, but over time, it represents a significant, and potentially unjust, cost. By raising awareness and advocating for change, we can work towards a more equitable system that recognizes the true nature of insurance and ensures that policyholders are not paying unnecessarily for a service they may never use.

The time to start this conversation is now, and it begins with understanding the hidden costs we face and demanding transparency and fairness from the system.