In a relief to insurance companies, the finance ministry has revoked its demand asking insurers to pay service tax on commission they receive from reinsurance companies.
The Central Board of Excise and Customs (CBEC) has clarified that service tax cannot be levied on the reinsurance commission because an insurance company does not provide any service to a reinsurance company.
Insurance companies are required to reinsure a part of the sum assured with reinsurance companies. This way, they transfer some risk on the sum assured to another entity (reinsurer) on payment of a portion of the premium. Reinsurance companies share back a part of the premium with insurance companies as the latter has to bear higher administrative costs and other expenses.
Tax officials had issued showcause notices to insurance companies for paying service tax on the reinsurance commission, which, they said, was for promoting the business of the reinsurer. The demand notices, issued for the first time last year for service tax payment between 2004-05 and 2008-09, said the commission was liable to service tax under ‘Business Auxiliary Services’ head.
Insurers took up the matter with CBEC, which issued a circular recently and clarified the arrangement between the two was for sharing expenses. It also said reinsurance commission, despite being labelled commission, did not exactly have the nature of a commission.
“In fact, it is the reinsurer which provides insurance service to the insurance company. As both the insurance company and reinsurer pay service tax on the entire amount of premium charged by them, the question of charging service tax under any other taxable service does not arise,” the circular said.
Nishant Shah, partner, Economic Law Practice, said it could not be called a commission for promoting reinsurer’s business because policyholders of insurance companies did not know about the insurers. “They are just sharing the costs as administrative costs of insurance companies are high,” he added.
The Income Tax Appellate Tribunal had also ruled that the reinsurance commission was not paid for soliciting or promoting another’s business and that it was a compensation for cost of the ceding company.
