Life insurance companies are set to be spared of paying service tax on fund management fees. This is good news for policy holders investing in unit-linked insurance plans (Ulip) as they will not have to take a hit on their returns.
The Central Board for Excise & Customs (CBEC) has accepted the insurance regulators view that fund management fees should not attract service tax because managing a policy holders money is a part of an insurers business, said a government official. Fund management fees are charges levied by an insurer to meet expenses incurred on managing investments in Ulips. The policy holder absorbs the cost as it is factored in the market value of Ulip investments.
A couple of months ago, tax officers issued show cause notices asking insurance companies to explain why they cannot be charged a service tax on the fund management fees. It was reckoned that this could impact investor returns as fund management charges (FMC) are levied on the market value of investments known as the net asset value in technical parlance.
Back-of-the-envelope calculations showed that a service tax on FMCs could reduce returns of investors by 15-30 basis points annually. Insurers were of the view that a service tax on FMCs would amount to taxing companies twice.
Last year, revenue officers made a similar attempt to impose service tax on entry and exit loads linked to mutual fund schemes: loads are charges that investors have to bear while buying or selling units. But the CBEC struck it down and clarified that entry and exit loads charged from fund houses will not attract service tax.
On similar lines, the board is now set to issue a clarification saying that insurers will not have to pay service tax on fund management fees. Insurers will also be able to claim full credit on their taxes paid on inputs, said government sources. The industry has also asked the government to exempt commission agents with a turnover of up to Rs 8 lakh from paying service tax. But the board is yet to take a view on this issue, said an official.
ICICI Prudential Life Insurance managing director Shikha Sharma said permission to set off service tax liabilities with tax paid on input services would reduce the burden on life companies. It is very good that the clarification has come. The insurance industry had made a representation on this issue some time ago, she said.