Fight the service tax on insurance on fundamentals : ASI president
16 July 2004
According to Khan, life insurers do not provide service within the fundamentals of service tax constituting service to be taxed. Like banks, mutual funds and post office products, life insurers sell financial products. As such service tax cannot be applied on these products.
In the same vein he adds, "As a matter of fact there cannot be a service tax on the general insurance products."
Though an insurance premium is made up of components like contribution to mortality (risk premium), savings and insurer overheads, these would vary based on the nature of policies. And charging a tax rate on the risk premium is said to pose a serious problem to insurers.
Though it is the actuaries who arrive at the premium rate based on past loss experience, it is bit of a surprise when Khan says, "The government didn't consult us before announcing its decision to include life insurers under the service tax net. It is rather unfortunate." Excerpts
Life insurers have expressed apprehensions about the tax and the manner of its computation. Does ASI have any solution to their dilemma?
What solution can ASI provide for such illogical proposals of the government? I think the life insurers and also the general insurers must challenge this on fundamentals rather than on details. Besides I believe the public should challenge it as ultimately the public pays for this.
What does the government actually mean by the term 'risk premium'?
The general insurance premium is called risk premium, as that is the price for covering risk. If the risk insured, such as fire, accidents and alike, transpire, then the sum insured is paid. Nothing is paid at the end of the policy term, if the event insured against does not take place. The government is extending this logic (illogically) to life products and the premium component for death risk cover is being called risk premium.
But even the risk component in a premium has overheads included in it. So how would a life insurer bifurcate these and calculate the tax liability?
A life insurance product has a cost / premium associated with it. The life insurer cannot and should not split it for each component of its costing. Splitting itself can be a nightmare without any objective, though each component is taken into account individually while arriving at the premium. For that matter, the component of expected profit, as embedded in the costing, is internally known. Should that be disclosed to the government, tax authorities or even public?
Will the tax be levied on fresh / first premium or even on renewal premium?
It should not be levied on anything. Even if the government can force its way and the tax has to be paid, calculating it could be quite arbitrary.
Could the government come out with a standard risk incidence rate (mortality, critical illness and other insurance contingencies) and ask the life insurers to apply these rates on the sum at risk / sum assured?
No idea. They can come out with any absurd rule and get away with that. Let the government study as to how many countries in the world do such things. The service tax concept when propagated for the first time in India was stated to be an interim step to the introduction of value added tax (VAT). We now hear of service tax as well as VAT! The countries where the VAT system operates, do not have VAT on premiums, whether on life or general insurance.
How would a company calculate the risk premium on annuities?
Here the risk is of surviving in the long term. The premium has this component embedded. But it cannot be segregated for calculating tax.