Two weeks after the government announced a reduction in Goods and Services Tax (GST) on health insurance premiums from 18% to zero, insurance companies have moved to impose an 18% GST on commissions paid to agents and distributors. The decision, aimed at offsetting losses from the withdrawal of Input Tax Credit (ITC), has delivered a significant setback to insurance intermediaries across India.
With the latest GST change taking effect from October 1, 2025, insurers will no longer be able to claim ITC on expenses such as commissions, rewards, rent, technology, and manpower. Previously, the GST paid on such expenses could be adjusted through ITC, reducing the overall tax burden. The removal of this benefit has now made these costs direct and unrecoverable, affecting both profitability and expense management ratios.
Industry executives point out that insurers are caught in a tight spot — while regulators mandate that the benefit of lower GST on premiums must be passed on to customers, the simultaneous blocking of ITC leaves insurers with higher operating costs.
“To maintain balance among all stakeholders — customers, distributors, and manufacturers — commissions and rewards paid to distributors will now be inclusive of GST,” Aditya Birla Health Insurance (ABHI) stated in a note to distributors. “For instance, if the commission for a sale is ₹100, the payout will reduce by 18% to ₹84.74,” the insurer clarified.
Industry experts have warned that the new tax structure could heavily impact smaller agents and distributors who form the backbone of India’s insurance distribution network.
An 18% GST on commissions could make health insurance sales less lucrative, especially for individual agents and small-scale intermediaries who depend heavily on commission-based earnings.
“For many agents, this additional GST burden translates into lower take-home earnings and could render insurance distribution less profitable or even unviable,” said an official with a Mumbai-based insurance broking firm. “Companies will need to revisit commission structures or offer alternative incentives to retain their distribution partners.”
While customers may gain marginally from lower premiums following the GST cut, the overall ripple effects are negative for the industry. Insurers are facing increased costs without the cushion of ITC recovery, and distributors are grappling with reduced commission income.
Experts caution that this could lead to reduced motivation among field agents, slower policy renewals, and potential disruption in last-mile insurance penetration, particularly in rural and semi-urban areas.
The change underscores the unintended consequence of a well-intentioned reform. The GST reduction on premiums, initially aimed at making health insurance more affordable, has inadvertently squeezed the distribution chain, posing long-term challenges for the industry’s growth momentum.
