Insurers seek clarity over service tax on Ulips

Life insurance companies have written to the finance ministry seeking clarity on the proposal to tax the fund management services for Unit Linked Insurance Plans (Ulips).

In his Budget speech, Finance Minister P Chidambaram had announced the decision to bring fund management service provided for Ulips under the service tax net.

However, the Finance Bill states otherwise "" it said service tax would be applied not just on the fund management charges (FMC) but also on the premium allocations charges, policy administration and miscellaneous charges too.

Life Insurance Council (self-regulatory body of life insurers) has written to the ministry asking for clarity and has also sought for Insurance Regulatory and Development Authority's (IRDA) support on this matter. Insurance officials have demanded that premium allocation charges in Ulips should be exempt from service tax. 
 

BONE OF CONTENTION Finance ministry and insurers differ over service tax on Ulips
Illustration according to the  Finance Bill	Illustration according to insurers
* Total premium paid for the = Rs 100 Ulip policy	* Total premium paid for = Rs 100 the Ulip policy
* Risk premium = Rs 10	* Risk premium = Rs 10
* Amount actually invested = Rs 85	* Amount actually invested = Rs 85
* Gross amount charged for = Rs 5 the service provided [100-(10+85)]	* Gross amount charged for the service provided = FMC (varies from 0.8% to 2%)  on the income generated on Rs 85
* Therefore, service tax applicable on Rs 5 + FMC on income generated on Rs 85
* Therefore, service tax applicable on Rs 5 + FMC on income generated on Rs 85

Says the CEO of an insurance company, "The Finance Bill example is incorrect. It said that the service tax will be on the difference between the premium invested and the mortality charges plus the invested portion. On the remaining amount, there will be service tax, which brings premium allocation charges also under service tax."

"There is a 6 per cent initial management charges on open-ended mutual funds, which is not taxable. For MFs, the service tax is applied only on the fund management charges and not on entry load and exit load, then why should the premium allocation charges for Ulips be brought under the service tax net?" he adds.

FMC for Ulips varies among insurers and also depends on the fund chosen (debt fund, equity fund, balanced fund) by the policyholder. FMC on Ulips are normally in the range of 0.8 per cent to 2 per cent.