The Hindu Business Line : ULIP premiums may go up on service tax shift

Mumbai, Feb. 29 The premium on Unit Linked Insurance plans (ULIPs) could go up slightly, if companies decide to pass on the service tax burden on to their customers.

The Union Budget has made service tax applicable on asset management services for ULIPs. This is on par with the service tax on asset management services on mutual funds.

Companies, however, are yet to decide about whether they pass on the additional burden to customers or absorb the costs.

Loss of edge

Insurers are disappointed that ULIPs, which account for the bulk of the life insurance business, may lose a bit of their edge over mutual fund products. Currently, there is a service tax of 12.36 per cent on asset management services provided by mutual funds, which will now be applicable on ULIPs as well.

“Insurers pay service tax only on the risk premium of policies. With this service tax levy on asset management services, the fund management charges will go up,” said a senior LIC official

“It’s still very early to make an estimate. But if it is offset against input service tax and the net impact seems large in the next few months, then companies may pass it on to customers,” said Ms Shikha Sharma, Managing Director, ICICI Prudential Life Insurance.

Insurers said that ULIPs could lose a ‘psychological advantage’ but it would not make much of a material difference in terms of returns. “On an average, insurers charge anything between 0.70 per cent to 2 per cent of the fund value as fund management charge. The service tax will apply on the fund management charge,” said Mr Vivek Sood, Chief Investment Officer, Tata AIG Life Insurance.

Differential tax

Insurers believe that the proposal could mean a differential tax structure between ULIPs and other products.

Mr Nitin Chopra, Chief Executive Officer of Bharti AXA Life, said: “This proposal results in different tax structures for customers of ULIP and non-ULIP investment plans.”

Mr Bert Paterson MD, Aviva Life Insurance, said: “This is inequitable with other asset management companies like mutual funds where service tax is charged only on the fund management fees charged by the AMCs. There will also be systems and process implications for companies which could result in increased costs for the customer.”

Hike STCG Tax

The increase in the rate of tax on short term capital gains from 10 per cent to 15 per cent is, however, likely to benefit insurers.

“The hike in Short Term Capital Gains tax is a positive move as it will encourage individuals to focus more on value (versus momentum) and remain invested for longer periods,” said Mr. Bryce Johns, Chief Investment Officer, Kotak Life Insurance.

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