Raise in tax rates will not impact consumption

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With Goods and services tax coming into practice from 1 July, people are fearing higher GST rates will impact the consumption rates negatively. But according to the economists and industry experts, there is nothing to fear, as higher tax rates will not have any impact on consumption. Interest in buying products or services may remain unaffected with rise in tax rates, they added.

The service tax on financial services and telecom has been increased to 18% from 15%, by the GST Council. But according to a recent data in insurance, consumers seem to take the increase in tax rates at their own pace. Whenever the government has increased the tax rates or levied a cess to gather funds for its welfare projects, the sales did not hamper much.

Chief Econimist of Aditya Birla Group, Ajit Ranade said that, some financial products are less elastic in nature and at an individual level insurance is not very price sensitive.

In June 2015, when the service tax on risk premiums was raised to 14% from 12.36%, income from sales of new policies went up by 13.8%. For that financial year industry’s new business income rose to 22.55%. Another example in higher sales after increase in tax rates is the Krishi Kalyan. It took its service tax levels to 15% and in the same month income from sales of new policies rose to 29% and had a growth of 26.13% in that financial year.

V Manickam, Secretary General of Life Insurance Council also confirmed that, it did not impact insurance sales, when in the past tax rates were increased.

As per the current tax rates, service tax of 3.5% is levied on the protection part of endowment and unit-linked life insurance policies in the first year, followed by 1.75% for the second year onward. These prices will now go up to 4.5% in the first year and 2.25% from second year onward.



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