Life insurers to oppose service tax on premiums

The life insurance industry will lobby against the Union Budget's proposal to impose service tax on insurance premium, which is seen as a retrograde step and one that will be difficult to administer.

"We propose to meet up with the finance minister early next week," said Deepak Satwalekar, managing director HDFC Standard Life Insurance.

Senior citizens could end up paying at least 8 per cent to 20 per cent more premium to make up for the 10 per cent service tax levied, said senior insurance officials.

A similar proposal was made two years back when the then finance minister Yashwant Sinha announced a 5 per cent service tax on life insurance premium.

The government had then partially rolled back the move, stating the tax would be levied on the risk component only. Subsequently, the entire proposal was dismissed after the industry lobbied with the former government.

As segregating the risk component from the entire premium will be difficult to implement or administer, insurance companies stated an adhoc flat tax as a percentage of premium would be the only viable solution.

"However, younger policyholders would end up subsidising older ones," Satwalekar said. The risk premium for senior citizens is always higher than that imposed on younger people, since life expectancy for the former is always lower, thereby, affecting the premium cost of the mortality risk.

Other than on pure risk products, life insurance premium collected by an insurer consists of savings (on which the policyholder gets a return) and mortality charges.

It will be difficult to segregate the risk premium portion, which varies across companies, different products and different age groups.

What could pose a major problem is also the fact that it has yet to ascertained whether the tax will be imposed on existing policyholders as well.

"It is not very clear whether the service tax is prospective or retrospective," said S B Mathur, chairman, the Life Insurance Corporation of India (LIC).

Some senior LIC officials added that as contracts between policyholders and insurance companies are bound by legal agreements, any change made in the policy could be challenged in the court of law.

If existing policyholders were included in the service tax net, LIC would be the biggest revenue generator for the government.

"Should it not be possible to pass on the cost on policies already purchased, insurance companies may end up absorbing the cost. If this is the case, shareholders may need to bring in more capital or there could be cross-subsidisation by new policyholders," said Shivaji Dam, CEO Kotak Mahindra Old Mutual Life Insurance Company.

Entire IT systems will need to be re-ramped in the calculation of service tax on risk premium, he added. Just a handful of countries levy service tax on the risk portion of life premium such as Taiwan, a couple of states in the US, Iceland, Greece, Italy and Austria.