Final Project ON SERVICE TAX

INSURANCE AUXILIARY SERVICES

SERVICE TAX IN INDIA

The tax reforms committee headed by Dr.Raja.J.Chelliah recognized the

revenue potential of the service sector in India and recommended imposition 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 of service tax. Service tax is being proposed on fifteen 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 prime responsibility of the Government to fulfil the increasing

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, its contribution to the national treasury had been insignificant. 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

taxation. Thus production and consumption of services, which constitute a 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

information on types of insurance policy, document processing and remitting 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.

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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

person possessing a license/registration under the Insurance Act / Insurance

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 make assessments of the loss suffered by the insured and

submit there report to the insurance company.

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The term person will generally include not only natural person but artificial

persons like partnership firm, HUF, corporate bodies, association or body of

individual , charitable institutions , government undertaking, co-operative societies etc

TAXABLE SERVICE RELATED TO INSURANCE

Services covered in this category are the services provided by 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


Service providers providing services in relation to both 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

expense are reimbursed on actual basis in addition to the prescribed fee 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 .

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The insurance must relate to General insurance business or Life

insurance business and will also cover service relating to risk management, risk

assessment and evalution, settlement of insurance claims and service and 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 and Development 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

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The intermediaries like loss assessors, insurance surveyors, insurance

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 expenses, which are reimbursable on actual basis, such as

travelling, Boarding and Lodging expenses, are not subjected to Service Tax

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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 16th 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 by the insurance companies. Tax is payable in respect of old policies 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 Notification No. 9/2002 ST dated 1-82002) As a result , 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.

Insurance auxiliary services concerning General insurance business and

Insurance auxiliary services concerning Life insurance business include services

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 actuary, or intermediary or insurance intermediary or insurance agent, in

relation to insurance auxiliary services concerning general insurance business.

It includes Risk assessment, claim settlement, survey and 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 actuary, or intermediary or insurance intermediary or insurance agent, in

relation to insurance auxiliary services concerning life insurance business.

It includes Risk assessment, claim settlement, survey and 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 : 6 TH 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

snakebite, the things that affect them more frequently and directly. The report

suggested pooling of data between insurance companies and the government 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

their total annual commission income does not exceed Rs. 8 lakhs. Though 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 available to insurance agents (and insurance companies). In the case of 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 life insurance agents in principle are exempted from service tax (as 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 Menon , Executive Director, of

“PricewaterhouseCooper ,”Its Unfair to deny the threshold percent to insurance

agents who constitute 90 percent of the total agent across the country.”

CENVAT CREDIT

CENVAT CREDIT means Central Value Added Tax. 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 service or Inputs/Capital Goods or the Service Tax/Excise Duties payable thereon as indicated in the bill/ invoice of the Input service provider

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.

CONCLUSION

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Final Project ON SERVICE TAX

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Transcript of Final Project ON SERVICE TAX