GST Council to address Life Insurance ITC Issue; Reducing LIC’s Rs. 290 Crore Demand

In a recent development, the GST Council is preparing to provide much-needed clarity on the input tax credit for life insurers, particularly in light of the Life Insurance Corporation’s (LIC) substantial demand of Rs 290 crore. This upcoming move is expected to provide relief to the state-owned insurance conglomerate.

When dealing with traditional life insurance policies or endowment plans, the complexity of the Goods and Services Tax (GST) issue arises. In these cases, the GST is applied to only a portion of the plan, resulting in different tax rates. The first-year premiums are subject to a GST rate of 4.5%, with subsequent years subject to a rate of 2.25%.

The dual nature of these policies explains this variation. They are made up of an insurance component that is subject to GST and a savings component that is similar to bank deposits or investments and is thus exempt from GST.

The crux of the problem is the input tax credit claimed on the GST-free portion of the premium. Tax authorities argue that because the premium is exempt, businesses cannot claim input tax credit.

Because of this predicament, some tax officials believe that LIC should receive a lower credit than it has claimed, potentially necessitating the reversal of some of the claimed credits.

LIC, which has multiple registrations across the country, has received a notice from GST authorities, and other insurers are expected to follow suit in the coming months. Private insurance players may face similar actions, prompting the government to address the issue at the GST Council level. While LIC’s stock fell after this disclosure, tax experts say the initial notice is from the GST authorities in Bihar, and the payment process is expected to take time. However, the clarification process could take several months.

The notice in question pertains to a claim of Rs. 167 crore, with additional interest of Rs. 107 crore and a penalty of approximately Rs. 17 crore, according to a filing with the stock exchange. The notification pertains to the “non-reversal of the input tax credit availed and utilised on the item non-leviable to GST on the portion of the premium received by the corporation from the policyholder and the non-reversal of the input tax credit of the portion of the agent’s commission on the item non-leviable to GST on the portion of the premium and the exempted policies.”