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Insurers seek withdrawal of service tax

BS Economy Bureau

Life insurance companies today toughened their stand on the imposition of service tax by seeking a withdrawal of the proposed tax.

The companies, in earlier representations to the finance ministry, had demanded the government levy the tax only on the risk element of a life insurance cover.

In a meeting with Insurance Regulatory and Development Authority chairman N Rangachary in New Delhi, life insurers sought the insurance regulator's support for their representation to the finance ministry.

Insurers said the 5 per cent service tax proposed by Finance Minister Yashwant Sinha would not only affect the development of the industry but would also be difficult to administer.

"The risk element in an insurance policy varies from one year to another. As one grows older the risk premium increases, and it will be very tough for us to keep changing the premium due to the service tax," said the chief executive of a life insurance company.

After the meeting, Rangachary told reporters the life insurers had demanded that the government drop the service tax proposal altogether.

"There are a variety of savings instruments but a service tax on one of them would create a distortion (in the market)."

He, however, did not disclose whether the regulator would take up the insurers' demand with the government.

The IRDA chairman has also written to the finance ministry independently, seeking a levy only on the service tax element.

Rangachary said the withdrawal of the Section 88 benefits would also affect the life insurance business and could be detrimental to the pensions business, which was proposed to be liberalised.

Under Section 88 of the Income Tax Act, investment in certain instruments are eligible for a 20 per cent tax rebate.

The finance minister, in his budget speech, had proposed that those with a taxable income between Rs 150,000 and Rs 500,000 be allowed only 10 per cent rebate under Section 88, while no rebate would be available to those earning over Rs 500,000 a year.

...want rural, social sectors redefined

Meanwhile, some life insurance companies are realising that the rural market does not offer as much opportunity as they had expected, at least in the initial years.

This is forcing them to approach the Insurance Regulatory and Development Authority to take a fresh look at the definition of and the stipulations on rural and social sectors.

At a meeting of the Life Insurance Council chaired by IRDA member H O Sonig on Tuesday, the insurers raised the issue.

The Indian Institute of Management, Bangalore (IIM-B) has been asked to prepare a report on rural and social sector definitions and also to recommend if the prescribed level of exposure needs to be revised.

"Though final figures for the full financial year are not available, good progress was indicated at the meeting," Sonig said.

He said IIM-B had circulated a paper among insurance companies and would prepare a report after their opinion. "Based on the recommendations of the report, we will take a view," Sonig said.

He, however, added that insurers were told that till the time a new definition was notified, the present stipulations would have to be met.

According to the present definition, life insurers have to sell 5 per cent of their total policies in rural areas in the first financial year of operation.

It increases to 7 per cent in the second, 10 per cent in the third, 12 per cent in the fourth and 15 per cent in the fifth financial year.

Similarly under social sector obligations, life insurance companies are required to insure 5,000 lives in the first financial year, 7,500 in the second, 10,000 in the third, 15,000 in the fourth and 20,000 lives in the fifth year of operation.

According to IRDA guidelines, a rural sector is the region, which, as per the local census, has a population of not more than 5,000 with a population density below 400 per square km and at least 75 per cent of the working male population is engaged in agriculture.

The social sector includes unorganised and informal sectors, economically backward, vulnerable or backward classes and other categories of people in rural and urban areas.

The sector also includes people belonging to certain castes and occupations and people with disability.

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