GST Hike on Commissions Hits Insurance Agents Hard

In a significant shift within the insurance sector, insurers have decided to impose an 18% GST on commissions paid to agents, just two weeks after the government eliminated the GST on health insurance premiums. This new tax regulation aims to mitigate losses stemming from the withdrawal of input tax credits (ITC), posing a major challenge for insurance intermediaries across India.

The recent GST cut allows customers to enjoy zero tax on health insurance premiums; however, it comes at a cost for agents and distributors, who can no longer claim ITC on commissions or other operational expenses, including technology and manpower. This change has substantial financial implications, as insurers will now face higher costs directly impacting their profitability.

Industry experts indicate that the new tax structure could significantly affect smaller distributors and individual agents, who are crucial to India's insurance distribution network. With an 18% reduction in commissions, many agents may find it increasingly difficult to sustain their operations in health insurance distribution unless insurers adjust their commission structures or introduce alternative incentives.

While the intention was to benefit consumers with lower premiums, the unintended consequences are evident as operational costs for insurers rise, while distributors see a decline in earnings. This paradox highlights the delicate balance between consumer interests and the sustainability of the insurance distribution model.

Aditya Birla Health Insurance has stated that commissions, rewards, and similar payments to distributors will include GST starting October 1, 2025. For instance, if the commission for a sale is Rs 100, the amount payable will effectively decrease to Rs 84.74 after GST is applied, demonstrating the direct impact of this tax on agent incomes.

The root of the problem lies in the GST framework’s treatment of exemptions. To reclaim ITC, there must be a GST component on the output, which is absent when the output tax is nil. A complete exemption prevents businesses from claiming ITC, whereas a reduced tax rate could still allow for partial set-offs.

As the health insurance sector's GST stands at nil, insurers lose this offset mechanism. Expenses such as rent and technology, still subject to GST, will become unrecoverable costs, further pressuring the financials of insurance companies.

Care Health Insurance and Star Health Insurance have both acknowledged the challenges posed by these changes. They have expressed their commitment to passing on customer benefits while absorbing some operational costs. However, the shift in the burden of GST on commissions to distributors is unavoidable, creating a complicated scenario for all parties involved.

ICICI Lombard General Insurance has also highlighted the pressure on margins, indicating that while insurers are required to pass on GST benefits to consumers, they are simultaneously losing the ability to reclaim input tax credits on essential expenses, which is squeezing profit margins.