The Indian insurance sector plays a crucial role in providing financial protection and promoting savings among individuals and businesses. However, insurance brokers — who act as key intermediaries between insurance companies and policyholders — have long been burdened by the inability to claim Input Tax Credit (ITC) under the current Goods and Services Tax (GST) framework.
Recently, industry experts and associations have renewed their demand for zero-rated GST status on insurance services to help brokers reclaim input tax credit and ensure a level playing field.
Current GST Structure for Insurance Services
Under India’s existing GST regime, insurance services are taxed at 18%, applicable on the premium charged to customers. While insurance companies collect and remit GST, brokers providing services to insurers or policyholders face a significant challenge — they pay GST on inputs such as rent, software, marketing, and professional services but are unable to claim ITC, as insurance services are not considered zero-rated or exempt with credit.
This means that although brokers incur GST-related expenses in their operations, they cannot offset these costs, ultimately increasing their operational burden.
Why Brokers Are Seeking Zero-Rated GST Relief
Insurance brokers are urging the government to classify insurance services as zero-rated supplies, similar to exports, allowing them to claim refunds for the GST paid on inputs. The move, they argue, would ensure tax neutrality and make the business environment more sustainable.
Here are the main reasons behind their demand:
Elimination of Tax Cascading:
Without ITC, brokers end up paying taxes on taxes — a situation that the GST system was originally designed to prevent. Zero-rating insurance services would eliminate this cascading effect.
Improved Cash Flow for Brokers:
Insurance broking firms, especially smaller ones, often operate on thin margins. The inability to reclaim ITC locks up working capital. Zero-rated GST would free up cash flow, enabling better operational efficiency.
Encouraging Wider Insurance Coverage:
By reducing costs for brokers, zero-rating could make insurance distribution more efficient and affordable. This could contribute to increasing insurance penetration in India, which still remains low compared to global standards.
Parity with Other Financial Services:
In several global markets, insurance intermediaries are either zero-rated or exempt with credit provisions. Indian brokers argue that similar treatment would make the domestic market more competitive and aligned with international practices.
Industry Reactions and Policy Expectations
Industry bodies like the Insurance Brokers Association of India (IBAI) and other financial experts have consistently voiced their concerns about the existing GST framework. They argue that while the government has taken several reformative steps in GST compliance and rate rationalization, the insurance sector remains an outlier in terms of tax relief.
Many stakeholders are hopeful that the GST Council, in its upcoming meetings, will consider reclassifying insurance services under zero-rated supplies, especially as part of the broader GST rationalization drive expected in FY26.
A policy shift toward zero-rated GST could also support the government’s goal of “Insurance for All by 2047”, as outlined by the IRDAI (Insurance Regulatory and Development Authority of India). By lowering the indirect tax burden on intermediaries, the ecosystem could become more cost-effective, benefiting both insurers and policyholders.
Challenges in Implementation
While the proposal for zero-rating seems logical, there are a few policy and administrative challenges to consider:
Revenue Implications: The government would need to manage potential short-term revenue loss due to ITC refunds.
Complexity in Categorization: Identifying which insurance services or brokers qualify for zero-rating could be tricky.
Need for Uniform Guidelines: Clear procedural rules would be required to prevent misuse or fraudulent ITC claims.
Despite these challenges, industry experts believe that the long-term economic benefits far outweigh the temporary revenue concerns.
Way Forward
To promote financial inclusion and support intermediaries, the government may consider a phased approach to GST relief. This could include:
- Granting zero-rated status to select categories of insurance services first (like health or rural insurance).
- Allowing partial ITC refunds to brokers based on input expenses.
- Establishing a transparent claim mechanism to ensure accountability.
Such reforms would not only align with the principles of GST but also enhance the efficiency of the insurance ecosystem.
Conclusion
The demand by insurance brokers for zero-rated GST status is not just a call for tax relief — it’s a step toward building a more robust, equitable, and growth-driven financial system. Enabling brokers to reclaim input tax credit would reduce operational costs, improve service reach, and support the government’s vision of expanding insurance coverage across India.
As the GST Council and Finance Ministry continue their review of tax rationalization measures, granting GST relief to insurance brokers could emerge as a pivotal reform that benefits the entire financial services sector.