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Budget Reactions: Higher service tax to make insurance premium costlier
March, 17th 2012

With increase in the service tax to 12%, insurance premia are likely to become costlier for life insurance products. "With the increase in service tax to 12% from 10%, the policyholders will have to pay higher insurance premiums for general and traditional life insurance products.

The increase in tax on various charges in the unit-linked products, premium allocation to policyholder fund will reduce," global consultancy firm KPMG partner Shashwat Sharma said. Within the existing limit for deduction (Rs 15,000 for individuals and Rs 20,000 for senior citizens), a deduction of up to Rs 5,000 is being allowed for preventive health check-up that will provide a fillip to preventive healthcare sector, he said.

It may also result in product innovation in health insurance industry like inclusion of payment for preventive health check-ups in health insurance premium, reduction in insurance premium for individuals who go for regular preventive health checkups amongst others, he added. Private insurer Bharti Axa Life Insurance felt increasing the sum assured to premium ratio to 10 times will promote long term contracts.

"It will also encourage customers to go in for higher protection. On the flip side, this will make life insurance costly for older age bands if they procure a product after age 45 since mortality rates go up," Bharti chief financial officer V Srinivasan said. Meanwhile, lifting the 20% restriction in Centvant credit and allowing 100% credit is a very welcome move as it will enable insurance companies to recover the entire input service tax from the output service tax liability, he said.

"Another point to note is the bringing of insurance companies within the ambit of the minimum alternate tax (MAT). This would result in insurance companies paying tax, the moment they start showing book profits," he added.

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