Insurance companies are in a dilemma over the five per cent service tax to be levied on agents. Insurers have two options: either to pass on the burden totally onto the agent or absorb it themselves.
Finance minister Jaswant Singh announced the roll back the decision on the five per cent service tax on life risk premium last week. However, former finance minister Yashwant Sinha's budgetary announcement on bringing 16 new professional categories -- including agents, lawyers, accountants, beauty parlours -- under the service tax hammer continues to stand. Hence, the agents will come under the service tax net.
Private insurance players have adopted a wait and watch approach to see what the competition is likely to do. The Life Insurance Corporation of India (LIC) does not intend to absorb this service tax burden. It will pass it onto the eight-lakh strong agency force, stated sources.
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"We need to take a call on whether to pass on the burden or absorb it. Much however, depends on what other players decide to do," said a private insurance player. The industry is still awaiting for the notification on the service tax levy, in terms of how it will be levied and on what commissions.
New players are facing a major predicament. If they choose to absorb the tax burden and pay the tax on behalf of the agents, the effective cost of commission could exceed the permissible 40 per cent cap as laid down by the regulator. "We need clarification from the Insurance Regulatory and Development Authority (IRDA) as to whether it will allow for a higher ceiling on the commission payable," said a senior official from a European-based life insurer.
On the other hand, if the insurer chooses to comply with the rules and collect the service tax amount from the agent, this will effectively bring down the commission rate. Taking the 40 per cent commission cap into account, this will effectively mean a lower commission of 38 per cent.
"Depending upon what the rest of the industry will do, the sale force could be disappointed if some players decide to absorb the tax burden. We are adopting a wait and watch approach," stated an insurance official at a private sector company.
LIC, the state insurer, earned a first year premium (FYP) income of Rs 14,844.05 crore in fiscal 2002. Of this, on an average seven to eight per cent is paid out to its agency force as commission. This is because LIC pays differential commission rates depending upon the type of policies sold.
As it has targeted a 40 per cent hike in FYP income for the current fiscal, a seven to eight per cent average commission payout, will translate into Rs 1,400-odd crore. Taking five per cent of this as the service tax payable by agents, it will amount to around Rs 70 crore.