Service tax will hit profits of insurers

The Finance Minister has proposed to levy service tax on the investment component of the traditional life insurance policies similar to ULIPs and this is likely to push up costs to policyholders. Besides, in ULIPs, some of the services offered by the insurance companies, such as premium allocation and policy administration charges, are back in the service tax net. This is likely to affect the yield on investment.

“Successive Budgets have enacted provisions either on the direct or indirect tax side, adversely impacting the insurance industry. This lack of a disciplined policy formulation can damage both the industry and the consumer, given the long-term nature of the products” says Mr V. Srinivasan, Chief Financial Officer, Bharti AXA Life Insurance.

Besides, service tax payable on input pool (on services utilised by insurance companies) which was earlier allowed to be set off fully against service tax collected on the policies, is now restricted only to 80 per cent. This means that the balance 20 per cent of the charges has to be written off by the insurance companies and this would affect their profitability, says Mr Srinivasan.

Mr Nageswara Rao, CEO and MD, IDBI Federal Life Insurance Co Ltd, said that increase in service tax is likely to attract higher charges, including on guaranteed ULIPs products.

“Micro insurance products should ideally have been exempted from service tax. This would have triggered penetration of the insurance sector into rural markets” says Dr Amarnath Ananthanarayanan, MD and CEO, Bharti AXA General Insurance.

He further said that with the rising medical costs, it's disappointing that Section 80D benefits remain unchanged. Nor are there any significant attempts made to increase healthcare infrastructure, he said.

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