Baffled insurance companies lose sleep over service tax impact

While the hike in FDI limit has been hailed by the overseas partners of insurance companies, the imposition of service tax on insurance premium and the transaction tax levied on all securities deals is proving to be a damper.

While the hike in FDI limit has been hailed by the overseas partners of insurance companies, the imposition of service tax on insurance premium and the transaction tax levied on all securities deals is proving to be a damper.

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Major insurance players are of the view that the imposition of service tax would create complications for computing the premium. It has also sent a signal that the country’s tax regime is not consistent, which is the basic requirement for creating a conducive environment for savings and investment.

A majority of insurance companies will have to invest huge amounts on IT to meet this challenge as they are not prepared to adopt the changes needed for incorporating the service tax. Secondly, most of the insurance products need to be restructured. In addition, the securities transaction tax is expected to bring down the returns, which are already low.

There is a lack of clarity on the issue of the hike in service tax, says Venkatesh Mysore, managing director, Met Life India. He further added that this might mean an increase in premium and the administrative charges will have to be factored in the pricing. There is a lot of ambiguity on this issue.

Interestingly, foreign partners have hailed the increase the FDI limit, some of the domestic partners particularly the financial institutions are not enthusiastic. Some of the institutions are of the opinion that the hike was not required. “There is no dearth of capital for insurance JVs. In addition, the 74:26 formula has not slowed down the introduction of innovative products,” says a leading banker.

“Under the current dispensation, Indian partners need to bring down their holding to 26 per cent from the current level of 74 per cent in 10 years. But the same is not being announced for foreign partners. This means that foreign partners become the single largest shareholders by the end of the tenth year,” says an official with an insurance joint venture.

Secondly, in case such a hike had been delayed more, the Indian partners would have got better premium for allowing the foreign partners to increase their stake to 49 per cent.

In fact, under the joint venture agreement of almost all the companies, foreign partners would increase their.