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How Did the Goods and Services Tax Impact the Car Insurance Sector in India?

The Goods and Services Tax (GST) was put in motion in the year 2000 when a committee was established to formulate and design a policy on a new form of tax. The GST Act was approved in April 2017 and came officially into effect from July 1 2017. The primary goal of GST was to unify multiple indirect tax regimes in India. With a single tax structure, GST replaced as many as 17 State and Central Taxes. As GST is also applicable to the insurance sector, this article shows how it has impacted car insurance in India.

What is GST?

Before we dive into the effect of GST on the insurance sector, let us try to understand what GST is briefly. In the pre-GST era, there were various types of taxes on the sales of goods and services. It included Central Excise Duty, Service Tax, Value Added Tax (VAT), Luxury Tax, Entry Tax, Purchase Tax and many others. Instead of these multiple indirect taxes, the government decided to charge a single unified system of collecting indirect taxes.

The Goods and Services Tax (GST) replaced such indirect taxes. Hence, any tax charged for the sale of goods and services by the Central or State government was converted into GST. The Central Government charged and collected the Central GST (CGST), and likewise, the State Government charged and collected the State GST (SGST) for the supply of goods and services between states.

Effects of GST on Car Insurance

Vehicle insurance or car insurance in India has attracted 15% as Service Tax, as per the previous regime of tax. However, as per GST, it has now increased to 18%. Thus, as we can comprehend, there is a hike of 3% now on car insurance rates and a resultant increase in the car insurance price. Individuals who wish to buy car insurance policy are affected by this tax as they have to pay higher premium amounts.

With the increase in the amount of car insurance premium, insurance companies are now offering various innovative features such as discounts on online car policy purchase, effective coverage and excellent customer service. There are also many insurance providers who are offering cashless garage facilities to enhance their customer service.

Even though GST on motor insurance has increased the premium amount you pay, you cannot drive a car on Indian roads without a valid insurance policy. It is because the Government of India has made car insurance mandatory, and everyone is liable to have at least third-party insurance cover for their vehicle.

You must not keep the amount of insurance premium as the sole criteria while choosing an insurance policy for your car. It is imperative that you realise the underlying benefits, inclusions and exclusions, terms and conditions of the policy before you choose the plan that offers you the highest protection at a competitive cost.

Another option to ensure that you avail the best car insurance is to see to it that you compare your policies and choose the right add-ons, which would cost you an optimal premium amount. You can take the assistance of a professional advisor or your insurance agent who can recommend the right add-ons for your policy.

How Does GST Impact the Customer?

Before the GST was implemented on the exchange of goods and services, a service tax of 15% was charged on the premium you would pay on car insurance. As the tax percentage has now increased to 18%, let us take a closer look at how it affected the premium prices with an example:

Suppose Ramesh purchases car insurance on which he needs to pay a premium amount of ₹10,000. In the below table, we have made a comparison of the amount Ramesh would have to pay in a pre-GST era and the amount Ramesh has to pay now, after implementation of GST.

Car Insurance Premium Pre-GST Rate Service Tax Total Premium
₹ 10,000 15% ₹ 1500 ₹ 11,500
Car Insurance Premium GST Rate Service Tax Total Premium
₹ 10,000 18% ₹ 1800 ₹ 11,800

Thus, as we can clearly see from the above example, Ramesh will have to shell out an extra ₹300 today in comparison to what he would have otherwise paid in a pre-GST era. However, this difference must not discourage you from buying car insurance and protecting you and your car against potential damage and losses.

Conclusion

As mentioned before, as per the rules of the Government of India and Motor Vehicles Act, it is mandatory for every vehicle owner to purchase at least a third-party insurance for their vehicle.

However, we must understand that third-party insurance will not offer you a complete cover as it does not include your own damage. Thus, if you are looking for a wholesome cover for both yourself and your car, it is advisable to buy comprehensive car insurance, which protects and covers both you and the third party in case of any unfortunate event.

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