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IRDA for 5-year freeze on ULIPs service tax
May, 31st 2008

The Insurance Regulatory Authority of India (IRDA) has sought a five-year freeze on service tax to be charged on life insurance companies that collect money from investors to manage their unit-linked insurance plans (ULIPS).

The regulator is understood to have sent a formal communication to the government to consider deferring the levy by at least five years on the ground that the industry needs more time to grow. A tax at this stage could also impact ULIPs investments, especially in a volatile stock market, said officials familiar with the development.

The move assumes significance as Parliament is slated to pass the finance bill early next week. In the bill, the government has proposed a 12% service tax on any amount charged by an insurer in relation to the management of investments under ULIPS. Normally, tax on new services comes into force after the finance bill gets the presidential nod. Back of the book calculations show that yield for ULIPs investors would drop by about 60 basis points, with a 12% service tax. Investors have to absorb this loss as insurance companies would pass on the burden to them.

 ULIPS are savings instruments which offer protection to the policy holder in terms of life cover and also flexibility in investments. These investments are akin to a mutual fund and the returns are reflected in the increase in the value of the unit, mirrored by the net asset value (roughly the market price) declared by the company. Mutual funds, for instance, charge loads that investors have to bear while buying or selling the units.

The load is charged over and above the NAV of the MF scheme. But entry and exit loads are exempt from service tax. Insurance companies also collect a host of charges including an allocation charge, policy administration charge, mortality charge, rider charge, fund management charge and surrender charge, among others.

What is perhaps not made clear to the investor is the fact that of every Rs 100 invested in the first year, a substantial portion goes towards commissions and other charges.

According to an insurance industry representative, the policy administration charge is comparable to the entry load of a mutual fund and surrender charge to the exit load. The ticket size for ULIPS is also smaller compared to a mutual fund. So, there is a case for exempting life companies from service tax, he said.

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