The Union Budget proposal of bringing life insurance under the service tax net is against the recommendations made by the expert group on taxation of services, headed by Dr M Govinda Rao.
The report -"Final Report of the Expert Group on Taxation of Services"_ commissioned by the department of revenue, ministry of finance (MoF), and submitted in March 2001, was to have been the basis for the government in the levy of service tax on various sectors.
The report recommended that life insurance services should be exempted from service tax.
The World Trade Organisation (WTO) also exempts all insurance and insurance-related service including life, accident, health and crop insurance from the service tax. In tune with the WTO negative list, the report also came out with a negative list of services, which ought not to be covered under service tax.
The list included all public services of government - civil administration, defence, police, intelligence, postal & telegraph, public sector enterprises, banks and insurance.
All public utility services - water supply and sewerage - as well medical and family welfare, school education up to 12th standard, and services exported outside India were to be excluded.
"It is important to ensure that this (service tax) does not hinder economic growth and reduce consumption entitlements of the poorer sections of society," the report stated.
The idea behind expanding the tax base and improving the revenue productivity of the system is to correct the unsustainable fiscal situation India faces.
Besides Rao, director Institute of Social & Economic Change, the expert group consisted various former members of Central Board of Excise & Customs (CBDT) like B C Rastogi (former CBDT chairman), D B Lal (former member, CBDT), Sukumar Shankar (member, CBDT) as well as M G Venugopalan (director, general service tax), Ashok Wadhwa (tax expert and consultant) and Arvind Virmani (senior economic advisor, MoF).
While the report stresses on the importance of increasing capital outlay and improve the poor state of infrastructure, "service tax will make life insurance a less attractive proposition as compared to bank deposits".
This, in turn, will affect the availability of long-term funds for infrastructure projects, said SBI Life Insurance Company CEO R Krishnamurthy.
The finance minister in his budgetary address signaled the need for enhancing finance towards infrastructure funding. This can be possible through life insurance and pension funds, which require long-term assets and can thus channel the funds into this sector, he added.
Imposing a service tax on existing policies will invite litigation as charging a tax on the premium payable will go against the grain of the contract signed between the insurance company and the policyholder, pointed out senior officials at the Life Insurance Corporation of India, which has the maximum to lose should existing risk covers fall under the service tax net.
There are over 321 petitions pending in various high courts across India with regards to service tax, stated the report.
