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Insurance premium may rise with service tax hike

Radhika Menon

Companies to bear the burden of agents' commission

Mumbai , March 1

Life insurance policyholders, particularly those having term policies, may be faced with a slight rise in premium due to the hike in service tax from 10 per cent to 12 per cent in the Budget.

Insurance companies, on the other hand, say that they will have to bear the burden of the hike in service tax with respect to the commission they pay to agents.

The service tax paid to agents is categorised as `input tax' and the service tax on premium paid by an individual would be an `output tax.'

The service tax paid by LIC for its 10 lakh agents was around Rs 650 crore for the FY 2004-05, said an official.

Mr T.S. Vijayan, MD, Life Insurance Corporation of India, said that the net impact of the hike in service tax would be around Rs 100 crore after offsetting input and output tax.

In terms of the policy-holder, the service tax would imply an increase in 2 per cent of the risk component of the premium of insurance products.

Mr Vijayan said that the hike in the premium would be passed on to group and unit-linked insurance policyholders of LIC.

The service tax will be applied based on the risk component in the premium of the policy. In the case of a term insurance product, where there is no savings element, the risk component and as well as the applicable service tax would be higher.

However, in the case of LIC the service tax may not be passed on to existing term policyholders since it is a life-long contract

In the case of endowment and unit-linked products, the lower risk premium and higher savings element would translate to lower service tax.

If the risk premium of a policy is Rs 100, the policy-holder will now have to pay Rs 112, as opposed to Rs 110.

However, insurance companies will take a hit with respect to the service tax paid for its agents.

Mr Gaurang Shah, MD, Kotak Mahindra Old Mutual Life Insurance, said that the burden on life insurance companies would increase since the service tax paid for agents would be substantially higher than the increase in risk premium of insurance products.

He said that the net impact on the company due to service tax would be to the tune of around Rs 2 .5 crore.

Mr Sam Ghosh, CEO, Bajaj Allianz Life Insurance, also said that the net impact on the company as the service tax paid for agents would be higher.

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