INSURANCE AUXILIARY SERVICES
SERVICE TAX IN INDIA The tax reform reformss commi committe tteee headed headed by Dr.Raj Dr.Raja.J a.J.C .Chel hellia liah h recogn recognize ized d the revenu revenuee potent potential ial of the servic servicee sector sector in India India and recomm recommend ended ed imposi impositio tion n of service tax on select services. Based on these recommendations Dr. Manmohan Singh, the Union Finance Minister, in his budget speech for the year1994-1995 introduced the new concept concept of service tax. Service Service tax is being proposed on fifteen fifteen individually individually specified services and the scope of certain existing services is being extended or clarified. Subsequent Finance Acts have added more and more services to be taxed for service tax purpose. As such today 107 services are chargeable to service tax.
NEED FOR SERVICE TAX It is prim primee resp respon onsi sibi bili lity ty of the the Gove Govern rnme ment nt to fulf fulfil il the the incr increa easi sing ng developmental needs of the country and its people, by the way of public expenditure. Government’s primary sources of revenue are direct and indirect taxes. Revenue receipts from customs and Excise duties are on the decline due to World Trade Organisation (WTO) commitments and rationalization of commodity duties. While the largest component of GDP in the country comes from the Service Sector Sector,, its contri contribut bution ion to the nation national al treasur treasury y had been been insign insignifi ifican cant. t. With With the increase in income , increasing portion of such incomes is spent on the consumption of services like entertainment, travel and tourism, etc. Though there exist various taxes or duties like Union Excise Duties, VAT, Sales Tax, Entry Tax, or Octroi Duty, etc by Central or State Government, most of the services are not directly subject to taxati taxation. on. Thus Thus produc productio tion n and consum consumpti ption on of servic services, es, which which consti constitut tutee a large large growing portion of the economy, contribute very little by way of taxation. Extending the tax to the service sector was not only to ensure neutrality and horizontal equity in
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taxation but also to broaden the tax base and improve revenue productivity of tax system.
INSURANCE When Insurance business was nationalized only life insurance corporation of India (L.I.C) and General Insurance Corporation of India (G.I.C) and its subsidiaries were allowed to do business. But with the opening up of the insurance sector for private participants like ICICI, HDFC, UTI etc the potential for generation of business has increased . This has also increased the dependence on intermediaries (or agents) for generation of business.
DEFINITIONS RELATED TO INSURANCE Insurance is a method of spreading over a large number of persons , a possible
financial loss , which can not be borne by an individual. As per sec 65(58), Insurer means any person carrying on general insurance business or life insurance business in India. Insured is any individual who takes the insurance policy from the insurance
company. He is the one whose risk is covered by the insured. Insurance Agent provides services to the insurance company in relation to the
marketing of insurance policies and provides services to the policy holder by giving inform informati ation on on types types of insura insurance nce policy policy,, docume document nt proces processin sing g and remitt remitting ing of insurance premium. Policy Holder includes a person to whom the whole of the insurable interest of
the policy holder in the policy is assigned once and for all is full and absolute but does not include an assignee. 2|Page
INSURANCE AUXILIARY SERVICES
INSURANCE AUXILIARY SERVICES Under sec 65 (55) of the act , the term Insurance auxiliary services means
any service provided by an actuary, an intermediary or insurance intermediary or an insurance agent in relation to general insurance business or life insurance business and includes risk assessment, claim settlement, survey and loss assessment. Actuary means an Actuary possessing required qualifications and must be a
per perso son n poss posses essi sing ng a licen license se/r /reg egis istr trat atio ion n unde underr the the Insu Insura rance nce Act Act / Insu Insura ranc ncee Regulatory Development Authority Act (IRDA). Intermediary or Insurance Intermediary mean the person connected with
the following business Insurance broker, reinsurance broker, insurance consultants, surveyors and loss assessors. Insurance Broker is a person between a company and insured and who solicits
business for the company from the public. Insurance Consultants are advisors who advice their client on the nature type
and various other aspects of insurance policy. Reinsures are brokers who are engaged in the business of reinsurance. Where
an insurance company in order to cover their risk re-insures themselves with another insurance company, which is called re-insurance. Surveyors assess the loss suffered by the insured. Loss Assessors Assessors make assessments of the loss suffered by the insured and
submit there report to the insurance company. The term person will generally include not only natural person but artificial per perso sons ns like like part partne ners rshi hip p firm, firm, HUF, HUF, corp corpor orat atee bodi bodies es,, asso associ ciat atio ion n or body body of individual , charitable institutions , government undertaking, co-operative societies etc 3|Page
INSURANCE AUXILIARY SERVICES
TAXABLE SERVICE RELATED TO INSURANCE
Serv Servic ices es cover covered ed in this this cate catego gory ry are are the the serv servic ices es prov provid ided ed by the the
insurance agents to the insurance company in relation to marketing of insurance policies.
The service providers are insurance agents, insurance surveyors and loss
adjusters, actuaries and insurance consultants.
The service tax is applicable to services provided on or after 16th July
2001 and any payment made for the services provided prior to this date will not liable to tax even though payment is made on or after the 16th July 2001.
Another point raised is to whether in cases where the bills raised by the
service provider are revised, the service tax is payable on the billed amount or on the actual amount received GDP payment is made on or after the 16th July 2001.
A point has been raised that the service provider, namely, an actuary, an
intermediary or insurance intermediary or an insurance agent is reimbursed certain out of pocket expenses such as traveling expenses, boarding and lodging charges on actual basis.
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Taxable services are proposed to be amended from General insurance
services and Life insurance services which include services provided to a policy holder or any person by an insurer, including a re-insurer.
ESSENTIAL INGREDIENTS RELATED TO INSURANCE AUXILIARY SERVICES
Serv Servic icee prov provid ider erss prov provid idin ing g serv service icess in rela relati tion on to both both type type of
insurance i.e. general and life then only service relating to general insurance is subject to service tax.
Incase of insurance agent it has been specifically provided in the rules
person liable to pay service tax will be the concern insurance company who has appointed agent not the agent himself.
Service provider like actuary or insurance intermediary are reimbursed
certain out of pocket expenses like traveling, boarding, etc on actual basis. This expe expens nsee are reimb reimbur urse sed d on actu actual al basi basiss in addi additi tion on to the the presc prescri ribe bed d fee fee such such reimbursable actual expenses are not subject to service tax.
Taxable service may be provided to policy holder including reinsurance
or insurer or any person in one or more of the following service like actuarial valuation, soliciting, etc.
The services must be provided by: a) An actuary or
b) An intermediary or insurance intermediary, or c) An insurance agent. 5|Page
INSURANCE AUXILIARY SERVICES
The The insu insura ranc ncee must must rela relate te to Gener General al insu insuran rance ce busi busine ness ss or Life Life
insurance business and will also cover service relating to risk management, risk assess assessmen mentt and evalut evalution ion,, settle settlemen mentt of insura insurance nce claim claimss and servic servicee and loss loss assessment.
Tax is payable by an actuary, or intermediary has the meaning assigned
to it in section 2(1)(1) of the Insurance Regulatory Regulatory and Developmen Developmentt Authority Authority Act, 1999.
The General insurance business and Life insurance business includes: a) Risk assessment. b) Claim assessment. c) Survey. d) Loss assessment.
Taxable service may be provided to policy holder including reinsurance
or insurer or any person in one or more of the following service like actuarial valuation, soliciting, etc.
ACTUARY OR INTERMEDIARY (EXCEPT INSURANCE AGENT) LIABLE TO PAY TAX 6|Page
INSURANCE AUXILIARY SERVICES
The The inte interm rmed ediar iarie iess like like loss loss asse assess ssor ors, s, insu insura rance nce surv survey eyor ors, s, insu insura ranc ncee consultants will be liable to service tax. However, exception has been made in case of insurance agent.
TAX PAYABLE BY INSURANCE COMPANY ON BEHALF OF INSURANCE AGENTS In respect of services provided by an insurance agent, any person carrying on the general insurance business in India or life insurance business in India is the ‘person liable for paying the service tax. [Thus, the insurance company is liable to pay service tax and not the insurance agent]. The service tax is payable on commission payable to the insurance agent.
TAXABLE VALUE Value of taxable service shall be the gross amount charged by the service provider for such service rendered by him, includes the commission, fee or any other sum received by actuary or intermediary or insurance intermediary or insurance agent from insurer. Rule 6 of the Service Tax Rules, 1994, provides for payment of Service Tax only on the amount received and not on the amount raised for the services provided. As such Service Tax is payable only on the amount actually received.
EXEMPTIONS AND EXCLUSIONS
Pocket Pocket expens expenses, es, which which are reimbu reimbursa rsable ble on actual actual basis, basis, such such as
travelling, travelling, Boarding Boarding and Lodging Lodging expenses, are not subjected subjected to Service Tax subject subject to production of documentary evidence in this respect. 7|Page
INSURANCE AUXILIARY SERVICES
The Service Tax is applicable to services provided on or after16th July
2001 and any payment made for the services provided prior to this date will not liable to tax even though payment is made on or after 16 th July 2001.
TAXABLE SERVICE RELATING TO LIFE INSURANCE Taxable service means any service provided to a policyholder, by an insurer carrying on life insurance business in relation to life insurance business. Though the service is provided by the life of insurance agents, service tax is not payable by them, but but by the insuranc insurancee compan companies ies.. Tax is payabl payablee in respec respectt of old policies policies also. also. (Section 65(90) (zx) of Finance Act 1944 as amended). Value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. EXEMPTIONS AND EXCLUSIONS
It has been decided to exempt the service tax leviable on life insurance business (as per Notificati Notification on No. 9/2002 9/2002 ST dated 1-82002) 1-82002) As a result , service service tax is not payable on the service provided by an insurer to a policy holder in relation to life insurance business.
PERSONS RESPONSIBLE FOR COLLECTING SERVICE TAX
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The Chairman-cum-Management Director of the National Insurance
Company Limited/ New India Assurance Company Limited/Oriental Insurance Company Limited/United India Insurance Company Limited.
Any other person carrying on general insurance business and who has
obtained a certificate of registration under sec.3 of insurance act, 1938.
General ral insuran insurance ce busine business ss and Insurance Insurance auxiliary auxiliary services services concerning concerning Gene insurance business business include services Insurance auxiliary services concerning Life insurance
provided to a policy holder or any person or an insurer, including a re-insurer.
STATUTORY COVERAGE FOR GENERAL INSURANCE BUSINESS IN RELATION TO SERVICE TAX
Service to a policy holder or any person or insurer, including re-insurer,
by an actuar actuary, y, or interm intermedi ediary ary or insura insurance nce interm intermedi ediary ary or insura insurance nce agent, agent, in relation to insurance auxiliary services concerning general insurance business.
It incl includ udes es Risk Risk asse assess ssme ment nt,, clai claim m sett settle leme ment nt,, surv survey ey and and loss loss
assessment [section 65(55)].
In respect of services provided by an insurance agent, the insurance
company is the ‘persos liable for paying the service tax’. The service tax is payable on commission payable to the insurance agent. However, the exemption available to small service providers cannot be availed by insurance agent.
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STATUTORY COVERAGE FOR LIFE INSURANCE BUSINESS IN RELATION TO SERVICE TAX
Service to a policy holder or any person or insurer, including re-insurer,
by an actuar actuary, y, or interm intermedi ediary ary or insura insurance nce interm intermedi ediary ary or insura insurance nce agent, agent, in relation to insurance auxiliary services concerning life insurance business.
It incl includ udes es Risk Risk asse assess ssme ment nt,, clai claim m sett settle leme ment nt,, surv survey ey and and loss loss
assessment [section 65(55)].
In respect of services provided by an insurance agent, the insurance
company is the ‘person liable for paying the service tax’.
EXEMPT MICRO-INSURANCE FROM SERVICE TAX [SOURCE
:
THE ECONOMIC TIMES
DATE
:
6TH JUNE, 2007]
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The Government should exempt micro-insurance from payment of Service Tax to make products cheaper and encourage penetration of insurance services in low income rural and social sectors, a UN report has suggested. The service tax 10.2 per cent on premiums adds to the price of insurance. To help keep premium low for rural poor, government could consider waiver of Service Tax on micro-insurance products for a limited period. THE UN DEVELOPMENT PROGRAMME (UNDP) report said.
Micro-insurance sector has the potential to generate a business of two billion dollars (over Rs.8,000 crore) in the next two three years in India , Anuradha K Rajivan, Author of the report, ‘Building security for the poor’. The report Suggested
partnership of insurance companies with micro-finance institutions for providing such products to the rural population according to their specific needs.
Insurance products made for the urban population cannot be suitable for their rural counterparts. They may need insurance for a single tree or insurance against snakeb snakebite ite,, the things things that that affect affect them them more more freque frequentl ntly y and direct directly. ly. The The report report sugges suggested ted poolin pooling g of data data betwee between n insura insurance nce compan companies ies and the govern governmen mentt as ‘building and sharing claims histories can help in aligning pricing decisions with actuarial calculations, thereby reducing price’.
The report added an investment of 1.65 million dollars would be needed to develop the micro-insurance business and tap the growth potential of micro-insurance in India.
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LIFE INSURANCE AGENTS MAY GET SERVICE TAX RELIEF [SOURCE
: BUSINESS STANDARD
DATE
:
25 FEBRUARY, 2008]
Life insurance agents are likely to be exempted from payment of sevice tax if thei theirr tota totall annu annual al comm commis issi sion on inco income me does does not not excee exceed d Rs. Rs. 8 lakh lakhs. s. Thou Though gh in principle the notification dated March 1, 2005, exempts from tax, service of aggregate value not exceeding Rs.8 lakh in a year (which brings into the ambit around 90 percent of the 20 lakh life insurance agents in a 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 the life insurance auxiliary service may get corrected in the 2008-09 Union Budget. For the service tax on insurance commission (service rendered by an insurance agent to an insurer), the responsibility of paying the tax rests with the insurance company (service recipients). The benefits 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 availa available ble to insura insurance nce agents agents (and insura insurance nce compan companies ies). ). In the case case of life life insurance agents, the service tax (12.36 percent) is paid by insurance companies which then deduct the amount from the commission of their agents. So even though most most life life insu insura ranc ncee agen agents ts in prin princi cipl plee are exempt exempted ed from from servi service ce tax tax
(as (as the the
commission earnings are below Rs.8 lakh), they are not getting the benefit as it is not extended to insurance companies.
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Life insurers have made submission to the finance ministry, requesting that “the benefit of service tax exempted below the threshold limit of Rs. 8,00,000 in a year may be extended to all service providers such as insurance agents, not withstanding that the actual remittance of the tax is made by the principle, namely, the insurance company, which is in fact a procedure to ensure efficiency of collection” Finally,
says
Sachin
“Price “Pricewat waterh erhous ouseCo eCoope operr ,”Its ,”Its
Menon
,
Executive
Director,
of
Unfair Unfair to deny deny the threshol threshold d percen percentt to insura insurance nce
agents who constitute 90 percent of the total agent across the country.”
CENVAT CREDIT CENVAT CREDIT means means Centra Centrall Value Value Added Added Tax. Tax. Service Service Tax payable by an assesses shall be subject to assesses availing of Cenvat Credit. Output service provider shall be allowed to take credit of the tax paid on the inputs and input service only after he makes the payment for the value of input servic servicee or Inputs Inputs/Ca /Capit pital al Goods Goods or the Service Service Tax/Ex Tax/Excis cisee Duties Duties payabl payablee thereon as indicated in the bill/ invoice of the Input service provider
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.
CONCLUSION
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