Insurance companies will have to return input tax credit after September 21, know what will be the impact on the cost..

ITC return news: The GST Council has decided to abolish the tax on health insurance and life insurance premiums. This will come into effect from 22 September 2025. But there is a catch for insurance companies that whatever input tax credit (ITC) they have accumulated till 21 September 2025, they will have to return it.

At present, policyholders have to pay 18% GST on insurance premiums, but after the new rates come into effect from 22 September, there will be no GST on the premiums. Insurance buyers will get the direct benefit of this.

What is the Finance Ministry's FAQ

In the questions and answers (FAQ) issued by the Finance Ministry after the 56th meeting of the GST Council, it has been stated that after the change in tax rates, the businesses for which tax on forward supply (outward supply) has been abolished will have to reverse the input tax credit deposited in their account.

According to the FAQ, the old input tax credit can be used in the outward supply of goods or services only till 21 September. Any supply made on or after 22 September, the date of implementation of the new rates, will have to reverse the input tax credit as per the provisions of the CGST Act 2017.

At present, there are four slabs of GST - 5%, 12%, 18% and 28%. The change in GST rates also includes individual life insurance, ULIP, endowment plans, and reinsurance services, including term insurance. Currently, 18% GST is levied on all these.

What do experts say about returning credit?

AMRG & Associates Senior Partner Rajat Mohan said that insurance companies usually use input services on a large scale. Such as IT platform, professional services, branch operations, etc. This makes it very complex for them to separate the credit. In such a situation, the provision of completely reversing the unused credit will increase the cost of this sector, especially when no refund has been provided.

According to Rajat Mohan, policyholders will get direct benefits from zero tax on premiums. But to strike a balance between consumer interest and industry sustainability, the government should consider reversing input credit in a phased manner or providing limited refunds.

Rahul Shekhar, partner at consultancy firm Nangia Andersen LLP, said the most important clarification for the industry is the treatment of exempted categories after the GST rate changes. He said companies should be prepared to reverse input tax credits.

Mahesh Jaisingh, partner and indirect tax leader at Deloitte India, also said that according to the FAQ, insurance companies can use input tax credits accrued at the old higher rates in their supplies (goods or services). But for supplies that have been exempted from GST from September 22, the credit will have to be reversed proportionately.

What will be the impact on premiums going forward?

Insurance companies purchase many types of products and services during their operations, on which GST has to be paid. They charge 18% GST on the premium while selling the policy to the customer. But they get credit for the GST paid on inputs. With the abolition of GST on premium, they will not get input credit. In this way, the tax paid on input will be included in their cost. Therefore, some experts say that customers will hardly get the full benefit of 18% discount in GST.

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