Summary: Under Rule 32(4) of the CGST Rules, the value of life insurance services is determined by excluding the portion of the premium allocated for investment or savings from the gross premium. This rule stipulates that only the portion of the premium related to risk cover is taxable. The portion of the premium that pertains to investment or savings is not included in the taxable value and thus does not affect the Input Tax Credit (ITC) reversal. Life insurance services are taxable, but Rule 32(4) allows for a portion of the premium to be deducted from the taxable value, which does not constitute an exempt or non-taxable supply. Consequently, this excluded portion of the premium does not trigger the reversal of ITC under Rule 42 of the CGST Rules. ITC reversal is only required when goods or services are used for non-business purposes or for making exempt supplies, which does not apply to the excluded premium portion under Rule 32(4).
Life Insurance Services:
- Life insurance companies provide services by insuring the life of the insured.
- In exchange, they charge a premium, which may include components for both risk cover and investment/savings.
Policies with Investment Components:
- Some life insurance policies include an investment or savings component in addition to the risk cover.
- As per the Insurance Act, 1938, these policies are considered part of the life insurance business.
Determining Value of Supply:
- The value of services in life insurance is determined under Rule 32(4) of the CGST Rules.
- This rule allows the deduction of the portion of the premium allocated for investment/savings from the gross premium to determine the taxable value.
- The said rule also provides for determination of value of supply of such services based on certain percentage of the gross premium in other situations
- If the entire premium is for risk cover, the entire premium is considered the value of supply for tax purposes.
Exempt Supply:
- According to Section 2(47) of the CGST Act, “exempt supply” includes:
(a) Supplies that are nil-rated.
(b) Supplies that are wholly exempt under Section 11 of the CGST Act or Section 6 of the IGST Act.
(c) Non-taxable supplies, which means supplies not subject to tax under the CGST or IGST Acts.
Non-Taxable Supply:
- As per Section 2(78) of the CGST Act, a non-taxable supply refers to goods or services that are not taxable under the CGST Act or the IGST Act.
Taxability of Life Insurance Services:
- There is no doubt that the service of providing life insurance by insurance companies to policy holders is taxable.
- The main issue is how to treat the portion of the premium that is not included in the taxable value, as determined by Rule 32(4) of the CGST Rules.
Premium Portion Not Included in Taxable Value:
- The service of providing life insurance is not nil-rated, nor is there any notification exempting any part of this service from GST under Section 11 of the CGST Act.
- A supply can only be considered non-taxable if it is not subject to tax under the CGST or IGST Acts.
- Life insurance services are taxable, but Rule 32(4) of the CGST Rules may exclude a portion of the premium from the taxable value.
Treatment of the Excluded Premium Portion:
- The portion of the premium not included in the taxable value under Rule 32(4) is neither nil-rated, wholly exempted, nor non-taxable.
- Just because a portion of the premium is excluded from the taxable value does not mean it becomes part of a non-taxable or exempt supply.
Reversal of Input Tax Credit (ITC):
- Rule 42 of the CGST Rules requires the reversal of ITC in certain situations.
- ITC must be reversed only if the provisions of Section 17(1) and 17(2) of the CGST Act apply, which restrict credit when goods or services are used partly for business and partly for non-business purposes, or for making both taxable and exempt supplies.
- The portion of the premium excluded from the taxable value under Rule 32(4) does not pertain to an exempt supply, so the reversal of ITC does not apply in this case.
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