Since agents are not liable to pay service tax on their output services, the input tax is a cost, as there is no set-off available to them.
Isnt the threshold exemption for payment of service tax Rs 8 lakh? Well, not exactly if you are an insurance or mutual fund agent. If you are such an agent, tax is payable on every rupee of the commission income earned, albeit indirectly, as the person paying the commission would be paying service tax on your behalf to the government and only the balance is paid as commission.
It appears that the Government, in its anxiety to spare the small agents the hassles of paying service tax or, more importantly, to save itself the bother of collecting service tax from numerous agents, not all of whom generate commission revenues in excess of Rs 8 lakh, has inadvertently committed this faux pas.
Agents of general insurance business were brought into the service-tax fold with effect from July 16, 2001, and this was extended to life insurance business from August 16, 2002. An insurance agent is generally tied to a specific insurance company and is employed to solicit insurance business. He interacts with prospective customers and the insurance company and helps customers in filling up the forms, choosing the right cover and completing various other formalities.
Mutual fund agents, on the other hand, were indirectly brought into the fold through Business Auxiliary Service in July 2003. The Government has clarified that the services provided by these agents are covered either as provision or marketing of services on behalf of the client or as commission agent, if not both.
Since the agent markets the offerings and receives commission for the mutual funds purchased by the investors, the departments position appears fair. However, small and marginal players, by perhaps an unwitting provision in law, seem to have got a raw deal. The commission income earned by an insurance agent, mutual fund distributor or a mutual fund agent is chargeable to service tax and there is no escaping this.
A lot of hardship could have been avoided if the law was not tinkered with. An agent, whether of an insurance company or mutual fund, would be liable to pay service-tax if his income crosses the threshold level and not otherwise.However, in terms of Rule 2 (1)(d)(iii) and (vi) of Service Tax Rules 1994, liability to pay the tax has been cast on the recipient of the service.
In other words, insurance companies and mutual funds are liable to pay service tax on the commission paid to these agents, as they are the recipients of the service.
As required by the law, insurance companies, being liable to pay service tax, deduct the tax from the commission payable to the agents and remit the same to the Government. And the service tax so paid can be set off against the service tax payable by them on their services, insurance policies, etc., and, therefore, it is revenue-neutral to such insurance companies.
Both the insurance and mutual fund sectors employ thousands of agents, most of whom are small players. The income from this activity seldom touches Rs 8 lakh, which is the threshold limit for service tax liability. If the Government had made service providers liable to service tax, most of them would not have been liable to the tax in view of threshold limit. This apart, the agents utilise various services on which they pay service tax. Since the agents are not liable to pay service tax on their output services, the input tax is a cost, as there is no set off available to them.
On the one hand, they pay tax through their principals, which they would not have paid because of the threshold limit and, on the other hand, they have to bear the burden of service tax on their input services which they could have utilised if they were paying the service tax.
It is reported that insurance companies plan to approach the Finance Ministry for tax exemption on the service tax paid on agent commission. However, this fundamental problem has arisen because the Government, either unwittingly or wittingly, has caused this problem and it can be rectified in the forthcoming Budget by removing these agents from the purview of Rule 2(1)(d)(iv) of the Service Tax Rules.
If, however, the Governments intention is to tax these commission incomes right from the first rupee earned, then certainly grave injustice is being done to the small and marginal players. This problem also stems from the fact that these agents are not well organised and their business is spread across the country.
There is no effective lobby to represent them and their travails are not heard in the din of big players seeking concessions. The total revenue garnered by the government from this tax is estimated at Rs 1,000 crore. Considering the fiscal constraints, whether the Government will bite the bullet remains to be seen.
D. Arvind J. V. Niranjan (The authors are Partner and Senior Manager, respectively, BSR & Co.)