According to four people with knowledge of the matter, the Insurance Brokers' Association of India (IBAI) is preparing to approach the GST Council and the Central Board of Indirect Taxes and Customs (CBIC) after preliminary discussions with the finance secretary and other officials received a favourable response.

In simple terms, a zero-rate means no GST is charged on the output, but credit can still be claimed for the tax paid on the inputs—removing the extra layer of tax that is currently building up through the value chain. This treatment would allow insurers and intermediaries to claim input tax credit on expenses including broker commissions. At present, insurers bear most of this burden themselves, with part of it being passed on to brokers in the form of lower commissions.

The brokers' push reflects mounting concern within the industry following the recent GST rationalization, which exempted retail term and health insurance to make products more affordable, but simultaneously blocked input tax offsets. This has prompted insurers to trim agent commissions and could eventually lead to higher base premiums, partly reversing the relief intended for customers.

Industry representatives say a zero-rated regime would align incentives across insurers and intermediaries, while preserving affordability for policyholders.

The IBAI is in the process of garnering support from insurance companies through the General Insurance Council and Life Insurance Council. However, support may not be as easy to come by, as some insurers remain wary of countering the government while others are sceptical about the impact.

"That's the conversation we've been having, that the industry as a whole should do it," Narendra Kumar Bharindwal, president of Insurance Brokers' Association of India said. The idea is to show an industry-wide cohesiveness on the issue and to reflect that this move will not just benefit intermediaries but insurance companies as well.

Policy shift needed

Karan Sarawagi, an advocate at Bombay high court said while the industry's request for a zero-rate GST structure with input tax credit is "conceptually sound and could ease the cascading tax burden", it represents a significant departure from the existing framework where this treatment is currently confined to exports and deemed exports.

"Extending such treatment to domestic sectors would require a major policy shift and could impact the delicate balance of revenue sharing between the Centre and states", especially when many states are already under fiscal pressure on elimination of compensation cess, he said.

As part of the government's GST rationalization move in September, retail term and health insurance policies were exempted from the tax regime in response to a long-standing demand from the industry to make insurance more affordable in order to drive penetration.

Most industry participants had anticipated that the tax rate on insurance premiums would be brought down to 5% from 18%, which is why the exemption caught them off-guard due to the resultant loss of input tax benefit.

Consensus support eludes

Initial assessment after the GST rate cut had suggested that the subsequent increase in expenses might result in insurers increasing base premiums to pass on some of the cost to customers. However, the government-led push to pass on the entire GST benefit to retail customers, made insurers pass on some of the cost to their brokers through lower commissions.

"The government could have made it zero-rated, instead of exempt. Then whatever costs are incurred by insurance companies on services used for procuring a certain premium or business, even other than commission, they would have got input tax credit on those," Bharindwal said.

In addition to commission, insurers used to claim input tax credit on categories including office rent and brokerage, to reduce the overall tax liability by partly offsetting the tax paid to suppliers against premiums received from customers.

"They want the support of everyone, and that will be given by insurers. But I don't know how much they (government) will agree," a senior industry official told Mint. "The problem is that the GST Council is very clear on where the GST will be charged. They have only exempted retail policies; so group health and wholesale policies are still under the GST regime."

A more feasible solution would be to seek exemption for all health policies, including group insurance, as several retired government or public sector employees are still covered under such schemes, but have not got the benefit of the GST rate cut, he added.

Others are less optimistic about a favourable outcome, based on past experience. Insurance companies' representatives had approached the government and senior finance ministry officials, ahead of the implementation of the GST rationalization, but to no avail.

"I think the bus has left now, it's been a month past the GST cut," the second person cited above said, adding that as per the "body language" of the CBIC chairman and conversations so far, the government doesn't seem very receptive, and a change is unlikely at this point.

"They (government) have taken a decision based on some inputs. And no other industry has come back and asked for relief; so it would be very naive to ask them to allow them ITC benefit," he said. "If they did not listen to insurance companies, will they listen to brokers?"

There is also concern that any relief measure for insurers might set a precedent for other sectors facing GST-related challenges, given that the insurance sector is not alone in its grievance. The loss of input tax credit following GST rationalization has impacted multiple sectors, including FMCG, automotive, hospitality and tourism.

"Despite these pressures, there has been no major legal action, with most industries opting for policy dialogue and representation over litigation," said advocate Sarawagi. "The insurance sector's proposal for a zero-rated GST with ITC benefit follows this constructive approach, though extending such a relief could trigger similar demands from other sectors and further strain state revenues and compensation mechanisms," he said.

Commissions under pressure

The main issue for the insurance broking community stems from the commission cuts. One of the experts cited above said the community is effectively trying to get a GST exemption on commissions paid to agents through this move.

Mint, had on 30 September, reported that insurers are likely to reduce intermediaries' commissions to manage higher costs. Experts had then suggested that commissions paid to agents for retail health products are hereon expected to be inclusive of GST, resulting in a reduced payout to that extent.

The biggest hit is being felt by standalone health insurance companies, wherein 70-80% of the business comprises retail health policies, which are exempt from GST. Owing to this, non-life insurers seem more eager to support the broking industry's proposal, as compared with life insurers. Add to it the fact that 70% of the life insurance market share is held by public sector or public sector backed promoters means they would be less keen to go against the GST Council's decision, two people cited above said.

However, the life insurance sector is feeling the heat as well, with most players having taken a hit on profitability due to higher expenses in the September quarter. After announcing its quarterly results, HDFC Life chief financial officer Niraj Shah had told Mint that while the insurer will pass on the entire GST benefit to customers, it is looking to reduce distributor commissions due to the hit from loss of input tax credit.

"We are already in touch with all our distributors in terms of realigning some of the distribution commission. Those conversations are in progress, and I think we will execute all of them in the second half of the year," Shah had said.

A lingering concern, however, is that these commission cuts might not be sufficient for insurers to absorb the GST impact. This could mean that eventually insurers could still go ahead with an increase in base premiums, reducing the GST benefit for customers.

"Some of the larger insurers backed by big banks and promoters might be able to manage, but managing individual agents and brokers will be very difficult without appropriate commission payouts," the fourth person cited above said, adding that this will also go against the objective of increasing insurance penetration.

IBAI's Bharindwal, though, is sure the industry body does not want to engage with the government on this rhetoric, and will instead seek relief for the sector. "We believe that having meaningful conversations with insurers will definitely lead to a meaningful outcome," he said, adding that commission payouts should be market-driven and not managed. A zero-tax structure will benefit not just brokers, but insurance companies as well, he added.