Summary of Circular No. 214/08/2024-GST

Summary of Clarification on Reversal of Input Tax Credit for Life Insurance Premiums Not Included in Taxable Value

Subject:

Clarification on the requirement of reversal of input tax credit (ITC) in respect of the portion of the premium for life insurance policies which is not included in taxable value.

Background:

Representations from the trade and field formations sought clarity on whether the portion of insurance premium not included in taxable value per Rule 32(4) of CGST Rules should be treated as exempt supply/non-taxable supply and whether ITC availed on such amount needs to be reversed.

Key Clarifications:

  1. Definition and Scope of Life Insurance:
    • As defined in Section 2(11) of the Insurance Act, 1938, life insurance includes contracts for payment of money on death or contingencies dependent on human life, including unit-linked insurance policies and other instruments with investment components.
  2. Taxable Value of Life Insurance Premiums:
    • According to Rule 32(4) of CGST Rules, the value of supply for life insurance services is determined by deducting the amount allocated for investment/savings from the gross premium. If the entire premium is for risk cover, the whole premium is taxable.
  3. Definition of Exempt Supply:
    • Under Section 2(47) of the CGST Act, exempt supply includes nil-rated supplies, wholly exempt supplies, and non-taxable supplies.
    • Section 2(78) defines non-taxable supply as those not liable to tax under CGST or IGST Acts.
  4. Non-Taxable or Exempt Supply:
    • The portion of the premium not included in the taxable value, as per Rule 32(4), does not qualify as nil-rated, wholly exempt, or non-taxable supply. Thus, it cannot be treated as pertaining to exempt or non-taxable supplies.
  5. Reversal of ITC:
    • Rule 42 of the CGST Rules mandates reversal of ITC only for supplies used partly for business and partly for exempt/non-taxable supplies.
    • Since the portion of the premium excluded from taxable value is not considered exempt or non-taxable, ITC reversal is not required for this portion.
  6. Conclusion:
    • The amount of life insurance premium not included in taxable value as per Rule 32(4) should not be treated as related to exempt/non-taxable supply.
    • No reversal of ITC is required for this portion as per Rule 42 or Rule 43 of CGST Rules, in conjunction with Section 17(1) and (2) of the CGST Act.

Implementation:

  • Trade notices should be issued to publicize this clarification.
  • Any difficulties in implementation should be reported to the Board.

This ensures uniform application of the law across field formations and provides clear guidance on ITC reversal related to life insurance premiums not included in taxable value.