Service tax on insurance agents only for new policies

The service tax imposed on life insurance agents from August 16 this year would be applied only on commission received on new business booke...

The service tax imposed on life insurance agents from August 16 this year would be applied only on commission received on new business booked by them. finance ministry officials said renewal premium would attract the tax next year on policies issued since that date.

No renewal premium falling due till then would be liable to service tax, they asserted. There are over eight lakh agents in the industry today, barely 10,000 of them in the private sector.

Meanwhile, the legal position on whether the 5 per cent tax would be borne by the agent or the life insurer is still vague. Pending clarity, insurance companies have nevertheless begun taking on their books the requisite amounts, industry sources said. The insurers are obliged to contain their expenses on agency commission. In the case of the public sector insurer, the LIC Act caps this limit at 35 per cent.

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However, being new entrants in the market, the insurance regulations permit private players to pay up to 40 per cent on commission. In their case, agents would have to pay 2 per cent service tax.

Whether the service tax amount thus chargeable is taken within the overall agency expenses limit or whether the service tax will be over and above the maximum commission payable to an agent will be known only once legal opinion comes in.

Both LIC and private players confirmed that they were awaiting clarification on the legal status on the treatment of the service tax pay-out. Insurance Regulatory and Development Authority (Irda) officials, however, declined to comment in this regard. It is understood that there is some resistance in official circles to the absorption of the tax by insurers.

It seems the apprehension is that this will eventually be passed on at some stage to policy-holders, whereas the government has after great persuasion withdrawn that move.

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In the meantime, companies are taking no chance and have begun setting aside the requisite amount, whatever the expense head decided upon eventually. However, as a safeguard against any later development, several private insurance companies have warned their agents that they may have to shoulder the tax burden if it is so decided by the authorities.

The service tax issue has been a contentious issue since first proposed in the Budget 2002-03 as a 5 per cent levy on life insurance. However, following criticism over his ‘harsh’ treatment to long-term savings, then finance minister Yashwant Sinha dropped the provision and retained it for agents alone.