SERVICE
TAX TO COVER EXISTING LIFE POLICIES TOO
Service tax will be applied even on the premium instalments
of existing policies. This is contrary to the expectations
of life insurers that they would not have to revisit old contracts.
The government has also indicated that the levy on new services
that have been brought under the tax net will be applied as
soon as the Union Budget is passed and will not have to be
separately notified, as in the past.
The
impact of service tax on the risk premium on life insurance
will be felt by holders of over 14 crore policies issued by
LIC. The policyholders will now have to budget for a higher
premium on their existing cover. The increase could range
from 10.2% on term insurance plans to a 0.7-2% increase on
policies with savings.
The
proposal is a logistical nightmare for LIC, the biggest player.
Besides having to revisit each of the 14 crore contracts to
work out the break-up of risk premium, the corporation has
to contend with issuing new instructions on lakhs of salary-saving
scheme policies. This week, the top management of LIC met
with the finance ministry to explain the issues they face.
However, the corporation has already asked its actuarial department
to work on the feasibility of splitting contributions made
by policyholders into risk premium and savings contribution.
Private
insurance companies, which are better off with fewer policies
and a more advanced information technology system, have their
own set of problems.
Some
of them have accepted prepaid cheques for instalments of future
premium, while others have asked customers to provide standing
instructions to their banks for electronic clearing. One advantage
for private insurers is that most of their volumes have come
from unit-linked insurance plans, where the mortality charges
are separately identified.
The Budget had announced that the new levy would be imposed
only on the risk premium component of payments to insurance
companies. According to senior government officials, the service
tax will have to be paid even on premiums that come up for
renewal when the Finance Bill becomes a law.
The
decision to reintroduce service tax on the risk component
of life insurance was announced by finance minister P Chidambaram.
According to rough estimates made by the government, the risk
component works out to about 10% of the total premium paid
by the policyholder. The tax on the proposed 13 new services
will come into force on the date of enactment of the Finance
Bill. The bill is enacted after the official amendments are
passed by the Parliament and presidential assent is granted.
The
proposed service tax on the risk cover of life insurance does
not figure under the list of new services, since former finance
minister Yashwant Sinha had already introduced the tax. The
levy will, however, come into force as soon as the Finance
Bill becomes a law.
The
government expects to mop up Rs 14,150 crore from service
tax in the current fiscal. Of this, Rs 1,278 crore would come
from insurance and Rs 1,764 crore from other services (as
the government has expanded the scope of existing services
in the Budget).
The
target for insurance is quite low, considering that last year
non-life insurance companies alone, generated a risk premium
of Rs 16,000 crore. Sources said that a conservative estimate
has been taken on revenue realisation from risk premium on
life insurance. This is partly because of the decision to
grant credit of service tax and excise duty across sectors.
