The Hindu Business Line : General insurers in a tizzy

The Finance Minister's move to withdraw the exemption has sent shock waves in the general insurance industry. Sources said the industry plans to request the Finance Ministry next week to restore the exemption on reinsurance premiums. The Finance Bill has withdrawn the exemption with effect from the next financialonwards.

Sources said the withdrawal would amount to double taxation of the industry. While the service tax on domestic reinsurance was unlikely to make a big impact, reinsurance to foreign insurance companies would affect the insurers adversely, the sources say. Almost all the non-motor and health portfolios are reinsured either with the national reinsurer of India or with a slew of international reinsurers through treaties or through facultative arrangements.

For domestic reinsurance the service tax obligation would be on the national reinsurer — the General Insurance Corporation of India, which has so far benefited from the exemptions.

However, foreign reinsurers have no major presence in India other than accepting cession from the primary general insurers.

Consequently, a top-level source said, "There is no way Indian tax laws can apply on them."

This implies that the service tax liability would devolve on the primary insurers themselves. Similarly there was confusion over reinsurance through "Risk Pools", which implied sharing of both premiums and liabilities by a grouping of insurance companies to spread risk.

The sources said ideally the service tax assessee should be able to be avail of CENVAT credit.

This would allow the industry to set off service tax payout with service tax receipts. But the Finance Minister has not clarified this issue in the Finance Bill.

Industry estimates are that at least Rs 10,000 crore of premiums are with either domestic or foreign or the Risk pool.

The burden on reinsurance is expected to escalate by at least Rs 1,300 crore per annum on account of service tax.

This would be in addition to the service tax collected from customers, estimated at Rs 25,000 crore per annum.

The sources said draining such a large sum from the industry would weaken solvency ratios especially at a time when the Insurance Regulatory and Development Authority was making efforts to improve domestic insurance capacities.

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