Insurance Firms To Pass On 5% Service Tax

Disappointed by the decision taken by finance minister Yashwant Sinha today to partially roll back the service tax on life premiums, insurance companies have stated they will pass on the tax burden to customers.

This follows Sinha's announcement of a partial rollback of the proposed 5 per cent service tax on life insurance premium, and restricting the levy to the risk premium portion. Insurance companies will also lobby against the decision, requesting the finance minister to reconsider.

Sinha said in Parliament today that the 5 per cent service tax would be "confined to risk premium only" and not on the entire amount. The industry is waiting for a clarification as to how the risk premium will be separated from the entire insurance premium and taxed at the rate of 5 per cent.

 

The Insurance Regulatory and Development Authority (IRDA), in its role as a development authority, has been asked to identify how the tax is to be imposed. According to officials familiar with the development, the premium is likely to be in the ratio of 10:90, wherein the risk portion will be computed at 10 per cent and the savings portion of the premium at the balance 90 per cent.

HDFC Standard Life Insurance CEO Deepak Satwalekar told Business Standard that as the risk element varied from product to product and increased with age, it would be unfair to segregate the premium in such a ratio. "I am very disappointed. This will adversely affect millions of long-term savers and work against the infrastructure sector that Sinha had stated he wanted to help," he added.

The mortality charge varies widely depending on the term of the policy, the product purchased, age and health of the life insured. For instance, in a single-premium product, the mortality coverage is less than 1 per cent of the premium paid. The premium paid for a term assurance product on the other hand, is a 100 per cent mortality premium.

"The cost and administration of this levy will be more than the tax collection itself," said Shivaji Dam, managing director of OM Kotak Mahindra Life Insurance Company.

Going by the total premium collection of the Life Insurance Corporation (LIC) for 2001-02 at Rs 50,000 crore, the exchequer can expect to mop up around Rs 250 crore in this financial year. This is against the Rs 2,500 crore it could have garnered had the entire premium been taxed at 5 per cent. Finance ministry officials said that the government would lose around Rs 1,000 crore due to the Sinha's announcement today.

"Determining the service component on each of the policies sold by an insurer and the cost of administration and collection will be disproportionate to the actual collection," said Anuroop Tony Singh, CEO and managing director, Max New York Life Insurance Company.

"In administrating a uniform levy in terms of a deemed mortality charge will create inequity," said ICICI Prudential Life Insurance Company managing director Shikha Sharma. It would also result in cross-subsidisation by one segment or product, as a younger life would cross subsidise an older life and a primarily savings instrument (like pension plans offered by life insurers or endowment policies) would cross-subsidise a pure protection policy, pointed out Singh.

Insurance companies like ICICI Prudential and SBI Life, which are targeting children whose risk is less, will be negatively affected should the service tax on risk premium be flatly levied at 10 per cent of the total premium paid.

Most insurance companies are trying to encourage younger people to take insurance cover. However, levying tax on an ad hoc 10 per cent of the premium paid would discourage the youth from taking cover, as their portion of risk is less than those in the higher age brackets.

Private sector insurance companies are up in arms and feel that the finance ministry has dealt a heavy blow, which could adversely affect the performance of an industry that has just been opened up to the private sector.

"Single premium bonds will become more difficult to sell, and we will need to understand whether sale of pension products by life insurance companies will be subject to the service tax," she added.

None of the insurance companies, both state-owned LIC and the new insurers, are willing to bear the cost, which will be passed onto the customer.

Going by the benchmark of non-life insurance companies having passed on the 5 per cent service tax to the customer as of last year, senior LIC officials agreed that the tax burden in the case of life insurance would also be passed onto the policyholder.

LIC managing director N C Sharma told Business Standard, "We are thankful that the finance minister has considered this and will help the industry improve performance, which is especially necessary at this stage when competition is still nascent".

The performance of LIC in the month of March indicates that despite talks of the government imposing a service tax, the state insurer did well.