Insurance Companies In A Fix Over Service Tax Rider

Restaurants, barbers, doctors, lawyers, engineers and the like have been passing on the five per cent service tax imposed on them directly or indirectly to the customer.

Now, possibly for the first time, customers will not have to bear the additional cost of a service rendered -- simply because there is an intermediary which has no recourse to pass on the burden.

Service rendered by the insurance agent now falls under the service tax net. From September 1, 2002, insurance companies must deposit five per cent of the agency commission with Income Tax authorities.

According to the government notification, this tax is applicable on commissions from August 16, 2002. All new service providers, in this case insurance companies, were required to register themselves with the Central Excise and Customs Department and thereafter deposit the service tax regularly and file returns twice a year.

 

While finance minister Jaswant Singh did away with the earlier proposed five per cent service tax on life risk insurance premium, the former finance minister Yashwant Sinha's budgetary announcement on bringing 16 new professional categories -- including agents, lawyers, accountants, beauty parlours -- under the service tax hammer continues to stand.

While the non-life insurance industry has decided not to absorb the cost and pass on the tax to the agent, the life insurance industry is still confused. If it chooses not to absorb the cost of the 5 per cent service tax, the agent has no recourse to pass on the burden to the customer. Effectively, this will hit his total remuneration.

New players face a major predicament. If they choose to absorb the tax burden and pay the tax on behalf of the agent, the effective cost of commission could exceed the permissible 40 per cent cap laid down by the Insurance Regulatory and Development Authority (IRDA).

On the other hand, if the insurer chooses to comply with the rules and collect the service tax amount from the agent, this will effectively bring down the commission rate, lowering it from 40 per cent to 38 per cent.

However, there are a few players (including the Life Insurance Corporation of India) which can afford to absorb the cost as they are not paying the highest possible commission rates. At the same time, some new life insurance players like HDFC Standard Life Insurance, which give good commissions, do not have any leeway, without violating IRDA norms, if they are to absorb the service tax themselves.

The IRDA stated that any money given to agents, even the service tax if absorbed, has to meet the prescribed upper limit on commissions payable under the IRDA Act.

LIC chairman S B Mathur, however, pointed out: "We are examining the issue from a legal perspective. As per the notification, the service tax from insurance auxiliary services has to be paid by the insurance company, but the notification is silent as to who should bear the tax".

LIC agents say the state mammoth ought to bear the cost. According to the LIC Act, agents are service providers and LIC is the service receiver. Hence, going by the fact that service tax is liable to be paid by the customer and the duty of the service provider is to collect the tax, agents state LIC ought to bear the burden.