Life insurance agents may get tax relief

Life insurance agents are likely to be exempted from payment of service tax if their total annual commission income does not exceed Rs 8 lakh.

Though in principle the notification dated March 1, 2005, exempts from tax, services of aggregate value not exceeding Rs 8 lakh in a year (which brings into the ambit around 90 per cent of the 20 lakh life insurance agents in the country), the benefit of the exemption is not extended to insurance companies that pay the tax on behalf of their agents.

According to industry sources, this differential treatment of life insurance auxiliary services may get corrected in the 2008-09 Union Budget.

For service tax on insurance commission (services rendered by an insurance agent to an insurer), the responsibility of paying the tax rests with the insurance company (service recipient).

The benefit of exemption up to the threshold limit is not extended to such cases where service tax is paid by the recipient of service on behalf of the provider of service.

While the responsibility of actual payment of service tax lies with the service recipient (insurance company), the benefit of exemption up to the threshold limit is not available to insurance agents (and insurance companies).

In the case of life insurance agents, the service tax (12.36 per cent) is paid by insurance companies which then deduct the amount from the commission of their agents.

So even though most life insurance agents in principle are exempted from service tax (as the commission earnings are below Rs 8 lakh), they are not getting the benefit as it is not extended to insurance companies.

Life insurers have made a submission to the finance ministry, requesting that "the benefit of service tax exemption below the threshold limit of Rs 8,00,000 in a year may be extended to all service providers such as insurance agents, notwithstanding that the actual remittance of the tax is made by the principal, namely, the insurance company, which is in fact a procedure to ensure efficiency of collection."

Says Sachin Menon, executive director, indirect tax, PricewaterhouseCoopers, "It's unfair to deny the threshold exemption to insurance agents who constitute 90 per cent of the total agents across the country."