Budget 2011 – Service Tax Changes to ULIP and Traditional Plan

ULIP and Traditional Plan Insurance Premium costs are set to rise, with FM bringing in services provided by life insurance companies in the service tax net.
Service Tax on Life Insurance ServicesServices provided by life insurance companies in the area of investment are proposed to be brought into tax net with Budget 2011. Following changes have been proposed to life Insurance – 1. FM has also brought all unit-linked insurance plan (ULIP) charges under the net of service tax. Until now, only mortality and fund management charges were subjected to service tax. This means, policy administration charge and policy allocation charge, too, would come under the service tax net.

Why it is important?
According to estimates, as much as 64% of the new policies sold by insurers are ULIPs, which are products combining investment and insurance.

2. Proposed to increase the service tax on life insurance policies to 1.5 per cent from 1 per cent.

3. Traditional Products also comes into tax net, because of investment part.

What are traditional products?
Traditional products include money back and endowment plans.

The above move, would increase the premium cost for policyholders. Guaranteed ULIPs would also attract higher charges, after the Budget modification in the service tax.

In case of traditional products, the service tax rate has been increased from 1 per cent to 1.5 per cent. Although the increase is marginal, there could be some increase in premium or returns might be lowered. For new insurance plans these changes will be adjusted in the premiums and for old plan the yield will fall. In the traditional endowment life insurance products where it is not possible to segregate the mortality premium and the premium attributable to investment, service tax is payable at a gross rate of 1 per cent of the total premium.
For example, if you paid an annual premium of Rs 25,000, the service tax (of 10 per cent) was charged on Rs 250. Now, the service tax will be charged Rs 375.

Budget 2011 – Service Tax Change
Life Insurance Business [section 65 (105) (zx)]
1. Life insurance companies provide services relating to risk cover and managing investment for the policy holders. The former is already subjected to service tax. The latter is now being brought into the tax net. Similar services rendered by way of ULIP are already subject to service tax since 2008.
2. When the entire premium is only for risk cover the same shall continue to be taxed even in the revised definition. However in the case of other schemes, a significant portion of the premium is used towards investment, while the rest is allocated towards various overheads and mortality. IRDA in its circular Ref: IRDA/ACT/CIR/VIP/171/2010 dated November 21, 2010 has made it mandatory for the insurance companies to share this break-up with the policy holders in the case of “Variable Insurance Policies” under the heads: premium received, deductions towards mortality, commission and expenses, interest added and closing balance. Thus amounts relating to deductions for mortality, commission and expenses are not available for investment. After the enactment of the new levy, it is proposed to amend the Service Tax Rules to give the option to pay tax at the standard rate on that portion of the premium that has not been invested and is so indicated in any of the documents given to the policy holder. Where the break-up is not indicated in any document issued to the policy holder, option will be given to pay tax @ 1.5% of the gross amount of premium.