In a recent development, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 214/8/2024-GST on June 26, 2024, providing crucial clarifications regarding the treatment of life insurance premiums under the Goods and Services Tax (GST) regime. This circular addresses concerns related to the reversal of Input Tax Credit (ITC) for life insurance policies, particularly the portions of premiums not included in taxable value.
Life insurance companies offer various policies that typically include a dual component: one part covers the life insurance risk, and the other serves as an investment or savings vehicle for the policyholder.
The issue at hand is whether the portion of the premium allocated to the investment or savings component, which is not considered in the taxable value under Rule 32(4) of the Central Goods and Services Tax (CGST) Rules, 2017, should be treated as an exempt supply or a non-taxable supply.
This distinction is important because it impacts whether or not the life insurance company must reverse the ITC claimed on inputs and input services related to such premiums.
Clarifications Provided in Circular-214
- Definition of Life Insurance Business: The circular reaffirms the definition of “life insurance business” as per Section 2(11) of the Insurance Act, 1938. This encompasses contracts insuring human life, including contracts where payment is assured on death or the occurrence of specific contingencies related to human life. It also includes contracts with components of investment, such as Unit Linked Insurance Policies (ULIPs), where the policy serves both as an investment and an insurance product.
- Taxable Value Determination: According to Rule 32(4) of the CGST Rules, the value of life insurance services is determined by deducting the premium amount allocated for investment/savings from the total premium paid by the policyholder. If the premium is solely for life insurance risk coverage, the entire premium is considered the taxable value.
- Exempt and Non-Taxable Supplies: The circular explains that exempt supplies under Section 2(47) of the CGST Act include three categories:
- Services attracting a nil rate of tax.
- Services wholly exempt from tax under Section 11 of the CGST Act or Section 6 of the Integrated Goods and Services Tax (IGST) Act.
- Non-taxable supplies, which are services not subject to GST.
- Reversal of Input Tax Credit: Section 17(1) and 17(2) of the CGST Act, along with Rule 42 and Rule 43 of the CGST Rules, outline the circumstances in which ITC must be reversed. Typically, ITC is reversed when goods or services are used partially for taxable and partially for exempt or non-taxable supplies. However, since the premium amount excluded from taxable value under Rule 32(4) does not constitute an exempt or non-taxable supply, the circular clarifies that there is no requirement to reverse ITC on such amounts.
Real-Life Illustration
Let’s say Mr. Sharma purchases a life insurance policy from XYZ Life Insurance Co. The total annual premium for the policy is ₹50,000. This policy has two components:
- ₹20,000 is allocated towards life insurance risk coverage.
- ₹30,000 is allocated towards investment (such as in a ULIP).
Under Rule 32(4) of the CGST Rules, only the ₹20,000 portion allocated to risk coverage is considered taxable. The ₹30,000 allocated towards investment is not included in the taxable value.
The question arises: Does XYZ Life Insurance Co. need to reverse the ITC claimed on inputs used for the ₹30,000 investment component?
According to the latest circular, the answer is No. The ₹30,000 portion, though not taxable, does not qualify as an exempt or non-taxable supply. Therefore, XYZ Life Insurance Co. can retain the ITC without reversal.
Frequently Asked Questions (FAQs)
Q1. What is Rule 32(4) of the CGST Rules, 2017?
A: Rule 32(4) of the CGST Rules, 2017 provides the method for determining the taxable value of services provided in relation to life insurance. It specifies that the taxable value should exclude the portion of the premium allocated towards investment or savings, focusing only on the premium related to life insurance risk coverage.
Q2. What is an “exempt supply” under GST?
A: An exempt supply, as defined under Section 2(47) of the CGST Act, includes any supply of goods or services that:
- Attracts a nil rate of tax,
- Is wholly exempt from tax by a government notification, or
- Is a non-taxable supply, meaning it is not liable to GST under the CGST or IGST Act.
Q3. When is the reversal of ITC required under GST?
A: Reversal of ITC is required under Section 17(1) and 17(2) of the CGST Act when goods or services are used partially for taxable and partially for exempt or non-taxable supplies. In such cases, the taxpayer must proportionately reverse the ITC attributable to the exempt or non-taxable portion.
Q4. If a portion of the life insurance premium is not included in taxable value, does it require ITC reversal?
A: No, as per the recent clarification, the portion of the life insurance premium not included in the taxable value under Rule 32(4) does not require ITC reversal. This is because it does not qualify as an exempt or non-taxable supply.
Q5. What is the significance of Section 2(47) of the CGST Act in the context of life insurance?
A: Section 2(47) of the CGST Act defines what constitutes an “exempt supply.” This definition is crucial for determining whether the portion of the life insurance premium that is not taxable needs ITC reversal. The recent circular clarifies that such portions are not exempt supplies, and hence no reversal is needed.
Q6. Can you provide an example to explain the impact of this circular on life insurance companies?
A: Certainly! Consider an insurance policy with a premium of ₹60,000, where ₹25,000 is for life risk cover and ₹35,000 is for investment. The ₹25,000 will be taxable under GST, while the ₹35,000 is not included in the taxable value. As per the circular, the insurance company does not need to reverse ITC on inputs used for the ₹35,000 portion.
Read Also: Understanding Intermediary Services in GST: Circular-159
Conclusion
The Circular No. 214/8/2024-GST brings much-needed clarity to the treatment of life insurance premiums under the GST regime. By confirming that the portion of premiums not included in taxable value does not necessitate ITC reversal, the CBIC has simplified the tax compliance landscape for life insurers, ensuring a more uniform application of the law across different regions and jurisdictions. This move is expected to facilitate smoother operations for insurance companies while maintaining the integrity of the GST framework.
