Life insurance contributes 4.1 percent of GDP and also forms a significant chunk of household savings. In order to boost life insurance, levying of service tax should be revisited in order to make the product attractive.
Bajaj Allianz Life Insurance
Life insurance contributes 4.1 percent of GDP and also forms a significant chunk of household savings. In order to boost life insurance, levying of service tax should be revisited in order to make the product attractive. I would like to stress on matters related to service tax and income tax in the life insurance sector.
Revise service tax on FMC: One of the issues that have been recommended earlier as well by life insurers is service tax on fund management charges. At present, fund management charges (FMC) are capped at 1.35 percent. As recommended by IRDA, service tax is charged on this or the actual amount, whichever is higher. This results in unnecessary payment of tax if the actual FMC is less than 1.35 percent, especially in the current situation where recent guidelines and competition has forced insurers to reduce FMC. Hence, it is recommended that tax should be charged on the actual amount of the FMC.
Nil service tax on annuity purchase price: Another aspect where service tax should be re-looked at is on annuity purchase price. For instance, while purchasing an immediate annuity plan, a service tax of 3.09 percent is charged on the price. Hence, for a customer purchasing annuity worth Rs. 1 cr., the effective purchase price for the customer increases by Rs. 3,09,000, which is a significant amount. Considering the reluctance of people towards planning for their retirement through life insurance, this service tax may act as a further deterrent for customers.
Review of reverse charge mechanism: Service tax liability is normally discharged on the provider of the services. In case of Insurance Auxiliary Service it is to be paid by the service receiver (Insurance Company). Under this concept the tax has to be paid on the entire amount without any threshold limit. In case of service provider, threshold level is defined and is currently at Rs. 10 lacs. We feel that a threshold limit of Rs 10 lakh per agent should be considered when the payment is made under the reverse charge by insurance company.
Reduce Service Tax rate for Single premium: At present the rate of ST is high in case of 1st year and Single premium payments in case of traditional products. Since the charges/cost for entire life of policy are embedded in the premium and it is equated premium, it is felt that the Service Tax in case of single and 1st year premium should not be at such high rate and it should be same as for year 2.
Review of point of taxation: Service Tax is to be paid on the receipt of premium on risk part. In many cases the risk portion cannot be determined before underwriting. It leads to incorrect estimation and deposition and adjustments. It is felt that there should be exemption from point of taxation where the value of service is not identifiable. At policy level it leads to number of adjustments and it is administratively difficult for large volume.
Review of deadlines paying ST in case of associated enterprises: Due date for payment of Service tax in case of associated enterprise is the date on which it is credited in the books. Many times entries are posted after banking hours. It is not possible to effect the payment of service tax due on the same day. It leads to unnecessary payment of interest and unjust burden of expenses. We feel that this should be reviewed and in case of associated enterprise the due date for payment of service tax should be 5 days.
Avoid double taxation: The proceeds from an annuity plan also attract a tax deduction. This seems ironical since the corpus out of which the annuity is paid has been built out of the pensioner’s previously taxed income, while he was earning. As a result, it amounts to a double taxation for the pensioner, which seems unfair.
Tax incentive on pension plans: In an ageing economy like India, it is critical for one to have a retirement plan. Moreover, in the current scenario, where there is a lack of a social security system, measures to make pension plans more attractive need to be promoted. It is thus suggested to increase the existing limit to Rs. 2.5 lakh or more for such pension contributions. This may make pension plans offered by life insurers more attractive, since one of the main motives to purchase insurance remains tax saving.
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