With one single stroke, Finance Minister Yashwant Sinha has proposed to raise more than Rs 2,500 crore by bringing the life insurance sector under the 5-per cent service tax dragnet, till now an exempted industry. Sinha has also included life insurance auxiliary services under the service tax net. And the government hopes to collect a sizeable kitty year after year.

For instance, the Life Insurance Corporation of India (LIC) is likely to close this fiscal with a total premium income of Rs 50,000 crore and 5 per cent on this works out to whopping Rs 2,500 crore. In addition, there are several new private life insurers whose premium income will also be subject to service tax.

Says LIC acting CMD A Ramamurthy: "The provisions related to the proposed tax measure are not clear. Whether the tax should be charged on the total premium or only on the risk portion of the premium, and whether the tax should be charged on fresh business or even on renewal premium are to be clarified."

Even if the tax is to be levied on the first year premium alone, the government will amass not less than Rs 700 crore, as LICs first-year premium is around Rs 14,000 crore. And the government collects nearly Rs 500 crore from the general insurance industry through this route.

Sinhas move has caught the new private players completely by surprise. "It is double-whammy for policyholders. On the one hand some tax breaks have been withdrawn under section 88 for some categories, and on the other hand a new tax is levied," says Birla Sun Life Insurance CEO Nani B Javeri. Concurring with him, an AMP Sanmar Assurance official says: "For the private sector this is a new industry and we did not expect a tax on our services."

Curiously, all the new insurers are of the view that a life insurance policy should not be sold only as a tax-saving instrument. "It is advantageous to take a policy before this March than buying the same next fiscal," suggests Ramamurthy.