The insurance industry is looking for clarity on input tax credit, while tour operators have urged the government to re-examine the decision to disallow input tax credit on hotel rooms costing less than ₹7,500 per night, following the overhaul of the GST rates on Wednesday.

The GST Council has recommended an exemption of taxes on term, unit-linked endowment life insurance, individual health insurance, including family floater plans, senior citizen policies and reinsurance services. This implies there will be no tax on insurance policy premiums effective from September 22, 2025, from the 18 per cent charged earlier.

Insurance industry sources on Thursday indicated that they would pass on the benefit of lower taxes to the policyholders, but without the benefit of input tax credit services like brokerage commissions, office rent, etc.

“In the absence of ITC, insurers must either absorb the cost on input GST, which will adversely impact the VNB margins, or they will have to increase the premium,” Icra said in a report.

The report, however, said that even after partial or full pass through of higher cost, the cost of insurance will be cheaper for customers.

“The policies that have already been sold were priced factoring in the ITC, which will no longer be available. Companies will thus absorb the associated cost, impacting embedded value from existing business. The sales are anticipated to increase, which will enhance market penetration and provide long-term benefits to insurers,” the report said.

“While we begin transitioning our systems and products to the new regime, we believe that this change will spur demand over time and hence be accretive to our value of new business. We expect a non-material (less than 0.5 per cent) impact on our embedded value,” HDFC Life said in a filing to the NSE.

“Despite short-term margin pressure on the industry’s profitability because of the classification under the ‘exempt’ category, we believe the expected growth in premiums will strengthen the industry in the medium term and support sustainable expansion,” said Rushabh Gandhi, MD and CEO, IndiaFirst Life.

Hotel rooms

The GST Council has also lowered the tax on hotel rooms with rates up to ₹7,500 per day to 5 per cent without ITC from the previous rate of 12 per cent with input tax credit.

“This rationalisation will enable more affordable prices for mid-segment hotels to domestic/international tourists.

“But the associated withdrawal of the input tax credit will create a problem for tour operators that bundle hotel accommodation with other services because it increases the cascading effect of taxes... Industry stakeholders would have preferred a structure that allowed for input tax credit to ensure uninterrupted credit flow,” said Ravi Gosain, president, Indian Association of Tour Operators.