Input Tax Credit issue: Insurers to charge 18% GST on agents’ commission

Two weeks after the government reduced the Goods and Services Tax (GST) on health insurance premiums from 18 per cent to zero, insurers have moved to impose an 18 per cent GST on the commissions paid to agents and distributors. The move, meant to offset losses from the withdrawal of input tax credit (ITC), has come as a major blow to insurance intermediaries across the country.

Industry executives say insurers are caught between the regulator’s mandate to pass on the GST benefit to customers and the tax system’s structure that blocks ITC when the output tax is nil. “In order to maintain the right balance between the interests of all stakeholders — consumers, distribution partners, and manufacturers — we propose that commissions, rewards, and equivalent payments to distributors will be inclusive of GST from October 1, 2025,” Aditya Birla Health Insurance (ABHI) said in a note to distributors.

Industry experts warn that the new structure could squeeze smaller distributors and individual agents, who form the backbone of India’s insurance distribution network. “For many agents, an 18 per cent cut in commissions could make health insurance distribution less profitable or unviable unless companies revise commission structures or offer alternative incentives,” said an official of a Mumbai-based broking firm.

In effect, while customers may gain marginally from lower premiums following the GST cut, the ripple effects are being felt sharply across the industry. Insurers face higher operating costs, and distributors face lower earnings, highlighting the unintended consequences of a well-meaning tax reform.

“Effectively, GST on commissions, rewards, and equivalents for all fresh and renewal business shall be borne by distributors from October 1, 2025. For example, if the commission for a sale is Rs 100, the amount payable will reduce by 18 per cent to Rs 84.74,” Aditya Birla Health Insurance said.

The problem stems from how the GST framework treats exemptions. For a company to claim input tax credit, there must be a GST component — however small — on its output. “A complete exemption (nil GST) blocks ITC, while even a reduced rate, say 5%, would still allow a partial set-off,” explained a senior tax consultant, adding that ITC allows businesses to claim credit for taxes paid on inputs used to make taxable outputs, ensuring taxes are not paid multiple times on the same value addition.

Now, with the health insurance sector’s GST set to nil, insurers lose this offset mechanism. Expenses on rent, IT systems, advertising, outsourcing, and agent commissions — on which GST continues to apply — will add up as unrecoverable costs.

Care Health Insurance acknowledged the challenge while reiterating its commitment to passing on the entire GST benefit to customers. “For all health and general insurance companies, there are several cost components — such as rent, technology, and contractual manpower — on which GST will still be payable. We will absorb the impact of GST on these expenses. However, the GST on commissions will be passed on to distributors to maintain equilibrium and protect customer interests,” the company said in a communication to its agents.

Star Health Insurance echoed this view, noting that the exemption benefits customers but simultaneously increases operational costs for insurers. “The exemption of GST for customers is coupled with the loss of input tax credit to insurance companies. This will affect the financials of all insurers through higher costs. The regulator has mandated that the full benefit of GST reduction be passed on to the customer. Hence, from October 1, 2025, all payments — including commissions, rewards, and similar expenses — will be processed inclusive of 18 per cent GST. This ensures compliance and transparency in our financial practices,” Star Health said in a circular.

ICICI Lombard General Insurance also flagged margin pressures. “While insurers must now pass on the entire GST benefit to customers, they can no longer claim input tax credit on expenses such as commissions, administrative overheads, and operational costs. This is leading to increased operational expenses and impacting profit margins,” the company said.