After the GST exemption on individual life and health insurance, insurers offset lost input tax credit by cutting brokerage and commission — brokers now face shrinking margins
Mumbai / New Delhi
The recent GST reform, which exempts individual life and health insurance premiums from GST, has had an unintended fallout: private insurers are now reducing the commission paid to agents and brokers to recoup the loss of input tax credit (ITC). The shift is hitting insurance intermediaries hard, as their incomes get squeezed even as policyholders enjoy tax relief.
What Changed: GST Exemption and ITC Loss
From September 22, 2025, the government made individual health and life insurance premiums GST-exempt (zero rate). Previously, insurers collected 18% GST on premiums and in turn claimed input tax credits on business expenses such as commissions, rentals, call centers, technology, and marketing. The exemption, however, comes with a condition: insurers cannot claim ITC on those products anymore.
Insurance companies are now required to reverse accumulated ITC relating to these lines, a move that increases their cost base significantly. With the GST benefit passed to consumers, the burden is shifting downstream to distribution partners.
Commission Cuts to Brokers & Distribution Agents
To offset the financial hit, several insurers have begun reworking commission structures and reducing payouts to agents and brokers.
- Insurers such as Niva Bupa, Care Health, and ICICI Lombard have recast commission agreements by treating commissions as “GST-inclusive” — effectively cutting net receipts for distributors by roughly 18%.
- From October 1 onward, some insurers have already started cutting commission rates for agents to absorb the cost of lost ITC.
- The Life Insurance Council has petitioned the GST Council and Finance Ministry to exempt or zero out GST on agents’ commissions, arguing that maintaining an 18% tax on commissions will severely hurt distribution margins.
Many brokers now find that their effective earnings — after absorbing GST-inclusive adjustments — are significantly lower despite unchanged sales performance.
Why Brokers Are Feeling the Heat
Insurance brokers and agents operate on relatively thin margins and depend heavily on commissions for income. The removal of ITC compresses their flexibility.
Key challenges include:
- No reciprocal relief: While consumers benefit from the tax exemption on premiums, brokers get no offset for the commission-related GST burden.
- Fixed cost pressure: Agents often maintain offices, pay staff, invest in digital tools, conduct marketing — all of which previously fell under ITC. Without it, these costs must be absorbed.
- Delayed adjustments: Commission ceilings or payout policies set in earlier contracts may prevent immediate upward revisions.
- Reduced incentive: Lower commission margins may disincentivize aggressive distribution, especially for smaller players whose overheads already strained.
As one insurer put it, the measure “makes the consumer happy, but the backbone of the distribution system feels the pinch.”
Impact on Policyholders & Premiums
While the GST cut may look like a win for policyholders, the reality is complicated. Because insurers lose ITC, they might pass part of that cost onto premiums down the line.
Some insurers have indicated that premiums may rise subtly over time on non-GST-exempt lines or where regulation allows.
In short: while consumers are insulated in the short run, the strain on distribution could reduce coverage outreach or slow growth in new sales, potentially harming long-term access.
Reactions from the Industry
- The Life Insurance Council has formally requested the GST Council to exempt commissions.
- Many agents and brokers are pushing for urgent policy fixes or transitional support measures.
- Some propose phased ITC transition, or allowing commissions on exempt lines to be zero-rated, so distribution doesn’t bear the burden entirely.
Broader Implications for the Insurance Ecosystem
- Market consolidation: Smaller brokers may be forced to exit or merge due to margin compression.
- Digital platforms hit: Insurtech and aggregator platforms may also suffer as commissions shrink.
- Sales slowdown: With lower incentives, insurers may reduce agent recruitment or push to captive sales.
- Regulatory pressure: The insurance regulator (IRDAI) may have to step in to ensure agent viability and fairness.
What Needs to Be Done
To maintain a healthy distribution system, industry experts suggest:
- Commission GST exemption: Extend the zero rating or exemption to agents’ commissions so that ITC loss isn’t passed down.
- Transitional support: Offer rebate or compensation schemes during the transition period.
- Flexible commission policies: Allow renegotiation and upward revision where possible.
- Cost rationalization: Promote digital tools, shared services, or clustering to reduce agent overheads.
- Regulatory oversight: IRDAI and GST authorities to monitor commission fairness and protect small intermediaries.
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