Life Insurers To Move Fm Over Service Tax

Spurred by the positive attitude of the new finance minister Jaswant Singh and his view for a more liberal tax regime, the life insurance industry has collectively decided to make a second plea on the service tax issue. "We plan to make a representation to the new FM on how service tax on risk premium ought to be implemented," Shikha Sharma, managing director, ICICI Prudential Life Insurance, said.

The industry intends to make a representation to the new minister after July 15, when the Insurance Regulatory and Development Authority (Irda) chairman N Rangachary returns back to the country.

The former finance minister Yashwant Sinha had in his budgetary address announced a 5 per cent service tax on life insurance premium. The government had then partially rolled back the decision, stating the tax would be levied on the risk component only. The industry had made representations in the past to the finance ministry, together with the insurance watch-dog in the hope that the levy would be implemented in such a way that did not create anomalies among product spectrum and policyholders.

Sharma said, "We want the ministry to think through the operational issue of implementing the service tax, and not create a product anomaly".

The industry is making a second pitch to the ministry, not to ward off the tax on risk premium, but to insure against operational difficulties and hope that the implementation rightfully reflects the true risk. "Else we will see the younger generation subsidising the older generation," said a senior official from the Life Insurance Corporation of India.

The industry has proposed two methods of calculating the risk premium. Most private insurance players prefer a deduction of 5 per cent from death claims settled during the year. They have pointed out that the levy ought not to apply on policies that mature, as these reflect the return on savings from the premiums paid.

Alternatively, the Irda in its letter to the finance ministry had proposed that the tax be levied on the total sum at risk calculated by an actuary at the end of the year. The sum at risk is the probable amount that the corporation is likely to pay on account of death claims. Based on the sum at risk, insurance companies set aside reserves for future claims.

Both these methodologies give a true reflection of the risk element, with preference more for the former.