Undoubtedly, the life insurance industry has been growing at a steady pace over the last few years. From a low of 2.6 per cent contribution to the GDP figure in 2006, it rose to 3.26 per cent and 4.09 per cent in 2006 and 2007, respectively. The biggest propeller of this growth has been the unit-linked insurance plans (Ulips), which have, according to some estimates, accounted for nearly 90 per cent of the new business being generated by life insurers.
The new edict. The Finance Bill 2008-09 has brought the management of Ulips of life insurance companies under the service tax net. The mortality portion of the premium was already being taxed. The direct impact of this, however minimal, would be on the fund value of a policyholder.
What gets taxed. The charge is on the service provided by the insurer to the policyholder. The amount charged for levy of service tax will be the difference between the premium paid and the investible amount segregated for actual investment (including the mortality). For example, on a premium of Rs 100, if the mortality charged is Rs 10 and the investible amount is Rs 85, then the service tax is to be charged on Rs 5, that is 100 - (10 + 85). In the same scenario, if the investible surplus is Rs 75, the tax gets levied on Rs 15.
In simple words, the service tax of 12.36 per cent on Ulips is going to be charged on the entire amount that the insurer keeps after deduction of mortality charges and the investible amount. Much of it is reflected in the front-end premium allocation charge. So, higher the charge, higher is the impact. Nitin Chopra, CEO, Bharti AXA Life Insurance says, “By placing the allocation charges of Ulips under the service tax fold, while the entry load of other market-led instruments are not, Ulips are not being provided a level playing field.”
Elsewhere. In mutual funds, the service tax is charged only on the asset management charge. This fee is only a part of the recurring charges that the fund house can charge based on the size of the corpus. Usually it is 2.25 per cent of the corpus. The asset management charge is part of this and capped at 1 per cent.
Anil Sahgal, director of strategy and chief investment officer, Aviva Life Insurance, says, “The intent of the Budget speech was to bring equality between mutual funds and Ulips, which, perhaps, is not the case according to the illustration given in the Finance Bill.”
Further, the industry feels the tax will hurt insurance penetration in India. Chopra says: “Indian customers prefer investment-cum-insurance plans. Ulips as a category, promote buying of financial protection with the value-added benefit of market-led investments. Hence, Ulips need to be supported on the tax front to improve insurance penetration in India.”
The impact. The service tax will lower the returns for a Ulip holder. Says V. Srinivasan, chief financial officer, Bharti AXA Life: “Our analysis indicates that the internal rate of return (IRR) to customers on our products will reduce by 20-40 basis points per annum over a 15-year holding period, on account of this service tax.”
This would hold true with most other insurers as well. Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance, says: “The service tax, perhaps net of input credit on service tax available to the life insurance company, will likely be passed on to the consumer. As such, there will be no change in the expense ratio of the life insurance company.”
What to do. As various components of the premium of a Ulip are under the service tax net, the overall tax incidence for customers has gone up.
Look for plans that have a low upfront premium allocation charge. However, that does not mean that overall returns would be higher as insurers might resort to higher policy administration and fund management charges. A better way to view the cost-adjusted returns of any Ulip of any insurer is to get a hold of the net-yield figure.
