Some insurers, including LIC, have decided to challenge the show-cause notice issued to them by the Directorate of Service Tax.

Radhika Menon

Mumbai, May 1

Life Insurance Corporation of India will have to pay more than Rs 100 crore as service tax for 2005-06 while some private insurance companies would have to fork out Rs 20-Rs 50 crore as per a recent order of the Directorate of Service Tax.

Some insurers, including LIC, have decided to challenge the show-cause notice issued to them by the Directorate of Service Tax.

Insurance companies have been told by the Directorate that they can claim credit for only 20 per cent of their risk premium liability since it is a partially taxable component as per the Cenvat credit rule. Insurers say that as part of a separate clause of the Cenvat credit rule, insurance has been specifically exempted from the 20 per cent norm.

"Since service tax is a matter that is dealt with individual assesses, there has unfortunately been no unified action on the part of the insurance industry. Tax officials and insurance companies are using different clauses of the Cenvat credit rule to negotiate the issue," said a senior LIC official

The service tax paid to agents is categorised as `input tax' and the service tax on premium paid by the customer would be an `output tax.' Hence, the tax payable is arrived at after offsetting the output and the input tax.

The output 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 as well as the applicable service tax would be higher.

For instance, if LIC has paid Rs 640 crore as service tax on agency commission (input tax) and Rs 160 crore as the service tax on risk premium (output tax), if 100 per cent credit is given to input tax, the corporation has to pay no service tax. But with companies being asked to claim credit only for 20 per cent of their output tax which in this case would be Rs 32 crore, they would have to shell out the rest of the 80 per cent as service tax. "The Directorate of Service Tax has told insurance companies that irrespective of the input tax payable, the service tax credit would be restricted to 20 per cent of the output tax. There are several grey areas in terms of accounting, which need to be sorted out, " said the CEO of a private life insurance company.

(This article was published in the Business Line print edition dated May 2, 2006)
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