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. ased on these recommendations Dr. !anmohan "ingh# the $nion %inance !inister# in his budget speech for the year&''()&''* introduced the ne+ concept of service tax. "ervice tax is being proposed on fifteen individually specified services and the scope of certain existing services is being extended or clarified. "ubse,uent %inance -cts have added more and more services to be taxed for service tax purpose. -s such today &./ services are chargeable to service tax.

NEED FOR SERVICE TAX

It is prime responsibility of the 0overnment to fulfil the increasing developmental needs of the country and its people# by the +ay of public expenditure. 0overnment1s primary sources of revenue are direct and indirect taxes. Revenue receipts from customs and 2xcise duties are on the decline due to 3orld Trade 4rganisation 53T46 commitments and rationalization of commodity duties. 3hile the largest component of 0D7 in the country comes from the "ervice "ector# its contribution to the national treasury had been insignificant. 3ith the increase in income # increasing portion of such incomes is spent on the consumption of services li8e entertainment# travel and tourism# etc. Though there exist various taxes or duties li8e $nion 2xcise Duties# 9-T# "ales Tax# 2ntry Tax# or 4ctroi Duty# etc by Central or "tate 0overnment# most of the services are not directly subject to taxation. Thus production and consumption of services# +hich constitute a large gro+ing portion of the economy# contribute very little by +ay of taxation. 2xtending the tax to the service sector +as not only to ensure neutrality and horizontal e,uity in

1|Page

INSURANCE AUXILIARY SERVICES

taxation but also to broaden the tax base and improve revenue productivity of tax system.

INSURANCE
3hen Insurance business +as nationalized only life insurance corporation of India 5:.I.C6 and 0eneral Insurance Corporation of India 50.I.C6 and its subsidiaries +ere allo+ed to do business. ut +ith the opening up of the insurance sector for private participants li8e ICICI# ;D%C# $TI etc the potential for generation of business has increased . This has also increased the dependence on intermediaries 5or agents6 for generation of business.

DEFINITIONS RELATED TO INSURANCE

Insurance is a method of spreading over a large number of persons # a possible financial loss # +hich can not be borne by an individual. -s per sec <*5*=6# Insurer means any person carrying on general insurance business or life insurance business in India. Insured is any individual +ho ta8es the insurance policy from the insurance company. ;e is the one +hose ris8 is covered by the insured. Insurance Agent provides services to the insurance company in relation to the mar8eting 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 older includes a person to +hom the +hole 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.
2|Page

INSURANCE AUXILIARY SERVICES

INSURANCE AUXILIAR! SERVICES

Under sec "# $##% of the act # the term Insurance au&iliary ser'ices means any service provided by an actuary# an intermediary or insurance intermediary or an insurance agent in relation to general insurance business or life insurance business and includes ris8 assessment# claim settlement# survey and loss assessment. Actuary means an -ctuary possessing re,uired ,ualifications and must be a person possessing a license>registration under the Insurance -ct > Insurance Regulatory Development -uthority -ct 5IRD-6. Inter(ediary or Insurance Inter(ediary mean the person connected +ith the follo+ing business Insurance bro8er# reinsurance bro8er# insurance consultants# surveyors and loss assessors. Insurance )ro*er is a person bet+een a company and insured and +ho solicits business for the company from the public. Insurance Consultants are advisors +ho advice their client on the nature type and various other aspects of insurance policy. Reinsures are bro8ers +ho are engaged in the business of reinsurance. 3here an insurance company in order to cover their ris8 re)insures themselves +ith another insurance company# +hich is called re)insurance. Sur'eyors assess the loss suffered by the insured. Loss Assessors ma8e assessments of the loss suffered by the insured and submit there report to the insurance company. The term +erson +ill generally include not only natural person but artificial persons li8e partnership firm# ;$%# corporate bodies# association or body of individual # charitable institutions # government underta8ing# co)operative societies etc
3|Page

INSURANCE AUXILIARY SERVICES

TAXA)LE SERVICE RELATED TO INSURANCE

policies. "ervices covered in this category are the services provided by the

insurance agents to the insurance company in relation to mar8eting of insurance

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 &<th July

?..& and any payment made for the services provided prior to this date +ill not liable to tax even though payment is made on or after the &<th July ?..&.

-nother point raised is to +hether in cases +here the bills raised by the

service provider are revised# the service tax is payable on the billed amount or on the actual amount received 0D7 payment is made on or after the &<th July ?..&.

- 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 poc8et expenses such as traveling expenses# boarding and lodging charges on actual basis.

4|Page

INSURANCE AUXILIARY SERVICES

Taxable services are proposed to be amended from 0eneral insurance

services and :ife insurance services +hich include services provided to a policy holder or any person by an insurer# including a re)insurer.

ESSENTIAL IN,REDIENTS RELATED TO INSURANCE AUXILIAR! SERVICES

"ervice 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 +ill be the concern insurance company +ho has appointed agent not the agent himself. "ervice provider li8e actuary or insurance intermediary are reimbursed

certain out of poc8et expenses li8e 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 follo+ing service li8e actuarial valuation# soliciting# etc. The services must be provided by@
a6 -n actuary or

b6 -n inter(ediary or insurance intermediary# or c6 -n insurance agent.

5|Page

INSURANCE AUXILIARY SERVICES

The insurance must relate to 0eneral insurance business or :ife

insurance business and +ill also cover service relating to ris8 management# ris8 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 ?5&65&6 of the Insurance Regulatory and Development -uthority -ct#

The 0eneral insurance business and :ife insurance business includes@ a6 Ris8 assessment. b6 Claim assessment. c6 "urvey. d6 :oss assessment.

Taxable service may be provided to policy holder including reinsurance

or insurer or any person in one or more of the follo+ing service li8e actuarial valuation# soliciting# etc.

ACTUAR! OR INTER-EDIAR! $EXCEPT INSURANCE A,ENT% LIA)LE TO PA! TAX

6|Page

INSURANCE AUXILIARY SERVICES

The intermediaries li8e loss assessors# insurance surveyors# insurance consultants +ill be liable to service tax. ;o+ever# exception has been made in case of insurance agent.

TAX PA!A)LE )! INSURANCE CO-PAN! ON )E ALF OF INSURANCE A,ENTS

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 Aperson liable for paying the service tax. BThus# the insurance company is liable to pay service tax and not the insurance agentC. The service tax is payable on commission payable to the insurance agent.

TAXA)LE VALUE
9alue 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 < of the "ervice Tax Rules# &''(# provides for payment of "ervice Tax only on the amount received and not on the amount raised for the services provided. -s such "ervice Tax is payable only on the amount actually received.

EXE-PTIONS AND EXCLUSIONS

travelling# 7oc8et expenses# +hich are reimbursable on actual basis# such as oarding and :odging expenses# are not subjected to "ervice Tax subject

to production of documentary evidence in this respect.

7|Page

INSURANCE AUXILIARY SERVICES

The "ervice Tax is applicable to services provided on or after&<th July

?..& and any payment made for the services provided prior to this date +ill not liable to tax even though payment is made on or after &<th July ?..&.

TAXA)LE SERVICE RELATIN, 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. 5"ection <*5'.6 5zx6 of %inance -ct &'(( as amended6. 9alue of taxable service shall be the gross amount charged by the service provider for such service rendered by him. EXE-PTIONS AND EXCLUSIONS It has been decided to exempt the service tax leviable on life insurance business 5as per Dotification Do. '>?..? "T dated &)=?..?6 -s 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 RESPONSI)LE FOR COLLECTIN, SERVICE TAX

8|Page

INSURANCE AUXILIARY SERVICES

The Chairman)cum)!anagement Director of the Dational Insurance

Company :imited> De+ India -ssurance Company :imited>4riental Insurance Company :imited>$nited India Insurance Company :imited.

-ny other person carrying on general insurance business and +ho has

obtained a certificate of registration under sec.E of insurance act# &'E=.

Insurance auxiliary services concerning ,eneral insurance .usiness and Insurance auxiliary services concerning Li/e insurance .usiness include services provided to a policy holder or any person or an insurer# including a re)insurer.

STATUTOR! COVERA,E FOR ,ENERAL INSURANCE )USINESS IN RELATION TO SERVICE TAX

"ervice 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 Ris8 assessment# claim settlement# survey and loss

assessment Bsection <*5**6C.

In respect of services provided by an insurance agent# the insurance

company is the Apersos liable for paying the service tax1. The service tax is payable on commission payable to the insurance agent. ;o+ever# the exemption available to small service providers cannot be availed by insurance agent.

9|Page

INSURANCE AUXILIARY SERVICES

STATUTOR! COVERA,E FOR LIFE INSURANCE )USINESS IN RELATION TO SERVICE TAX

"ervice 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 Ris8 assessment# claim settlement# survey and loss

assessment Bsection <*5**6C.

In respect of services provided by an insurance agent# the insurance

company is the Aperson liable for paying the service tax1.

EXE-PT -ICRO0INSURANCE FROSERVICE TAX

1SOURCE DATE 2 T E ECONO-IC TI-ES 2 "T 3UNE4 56678

10 | P a g e

INSURANCE AUXILIARY SERVICES

The 0overnment should exempt micro)insurance from payment of "ervice Tax to ma8e products cheaper and encourage penetration of insurance services in lo+ income rural and social sectors# a $D report has suggested. The service tax &..? per cent on premiums adds to the price of insurance. To help 8eep premium lo+ for rural poor# government could consider +aiver of "ervice Tax on micro)insurance products for a limited period. T E UN DEVELOP-ENT PRO,RA--E $UNDP% report said. !icro)insurance sector has the potential to generate a business of t+o billion dollars 5over Rs.=#... crore6 in the next t+o three years in India # Anurad9a : Ra;i'an4 -uthor of the report# A uilding security for the poor1. The report "uggested partnership of insurance companies +ith 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 sna8ebite# the things that affect them more fre,uently and directly. The report suggested pooling of data bet+een insurance companies and the government as Abuilding and sharing claims histories can help in aligning pricing decisions +ith actuarial calculations# thereby reducing price1. The report added an investment of &.<* million dollars +ould be needed to develop the micro)insurance business and tap the gro+th potential of micro)insurance in India.

11 | P a g e

INSURANCE AUXILIARY SERVICES

LIFE INSURANCE A,ENTS -A! ,ET SERVICE TAX RELIEF

1SOURCE DATE 2 )USINESS STANDARD 2 5# FE)RUAR!4 566<8

:ife insurance agents are li8ely to be exempted from payment of sevice tax if their total annual commission income does not exceed Rs. = la8hs. Though in principle the notification dated !arch &# ?..*# exempts from tax# service of aggregate value not exceeding Rs.= la8h in a year 5+hich brings into the ambit around '. percent of the ?. la8h life insurance agents in a country6# the benefit of the exemption is not extended to insurance companies that pay the tax on behalf of their agents. -ccording to industry sources# this differential treatment of the life insurance auxiliary service may get corrected in the ?..=).' $nion udget. %or the service tax on insurance commission 5service rendered by an insurance agent to an insurer6# the responsibility of paying the tax rests +ith the insurance company 5service recipients6. The benefits of exemption up to the threshold limit is not extended to such cases +here service tax is paid by the recipient of service on behalf of the provider of service. 3hile the responsibility of actual payment of service tax lies +ith the service recipient 5insurance company6# the benefit of exemption up to the threshold limit is not available to insurance agents 5and insurance companies6. In the case of life insurance agents# the service tax 5&?.E< percent6 is paid by insurance companies +hich then deduct the amount from the commission of their agents. "o even though most life insurance agents in principle are exempted from service tax extended to insurance companies.
12 | P a g e

5as the

commission earnings are belo+ Rs.= la8h6# they are not getting the benefit as it is not

INSURANCE AUXILIARY SERVICES

:ife insurers have made submission to the finance ministry# re,uesting that Fthe benefit of service tax exempted belo+ the threshold limit of Rs. =#..#... in a year may be extended to all service providers such as insurance agents# not +ithstanding that the actual remittance of the tax is made by the principle# namely# the insurance company# +hich is in fact a procedure to ensure efficiency of collectionG %inally# says "achin !enon # 2xecutive Director# of

F7rice+aterhouseCooper #GIts

$nfair to deny the threshold percent to insurance

agents +ho constitute '. percent of the total agent across the country.G

CENVAT CREDIT
CENVAT CREDIT means Central 9alue -dded Tax. "ervice Tax payable by an assesses shall be subject to assesses availing of Cenvat Credit. 4utput service provider shall be allo+ed to ta8e credit of the tax paid on the inputs and input service only after he ma8es the payment for the value of input service or Inputs>Capital 0oods or the "ervice Tax>2xcise Duties payable thereon as indicated in the bill> invoice of the Input service provider

13 | P a g e

INSURANCE AUXILIARY SERVICES

C4DC:$"I4D

14 | P a g e

INSURANCE AUXILIARY SERVICES

15 | P a g e

INSURANCE AUXILIARY SERVICES

16 | P a g e

INSURANCE AUXILIARY SERVICES

17 | P a g e