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 Service Tax FAQs
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Service Tax FAQs
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1. I have received a letter regarding Service Tax on Risk Premium. What is it all about?

The Service Tax Act and Government Notification # 11/04-ST dated 10 September 2004, makes it obligatory for BSLI to levy and collect service tax at the rates in force on the date of providing service.

As per the Finance Bill 2007, the Government has introduced a new cess "Secondary and Higher Secondary Education Cess (SHE)" of 1% on the Service Tax. This cess is in addition to the existing "Education Cess (EC)" of 2% on the Service Tax.

Hence the letter is sent to intimate the customers of the enhanced premium to be paid, which is now inclusive of Secondary and Higher Secondary Education Cess (SHE)" of 1% on the Service Tax.

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2. What is the effective rate of service tax?
i) Term/Unit Linked plan

As per the Finance Bill 2007, the Government has introduced a new cess "Secondary and Higher Secondary Education Cess (SHE)" of 1% on the Service Tax. This cess is in addition to the existing "Education Cess (EC)" of 2% on the Service Tax.

Thus the effective service tax rate for TERM policies is [12% Service Tax + (2% EC on 12% + 1% SHE on 12%)]

The service tax applicable is 12 % on risk premium including on rider coverage premium plus 2 % Education Cess on the service tax amount. With the introduction of SHE of 1% on the Service Tax in the Budget 2007 has increased the effective service tax rate to 12.36 % (12% + 3% of 12%). This is applicable with effect from 12/05/2007.

ii) Term with return of premium (TROP)

The service tax applicable is 1 % on premium including on rider coverage premium plus 2 % Education Cess on the service tax amount. With the introduction of SHE of 1% on the Service Tax in the Budget 2007 has increased the effective service tax rate to 1.03 % (1% + 3% of 1%). This is applicable with effect from 12/05/2007.
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3. How is the service tax computed?

UL Plans

Service Tax - 12% of the risk premium
Education Cess - 2% on the service tax
SHE - 1% on the service tax
Effect Rate - 12.36% of the risk premium

In ULIP policies the service tax and educational cess payable is recovered from the policy fund by cancellation of units of equal amount. This means that the customer need not pay an amount over and above the premium under the policy.

For Example : Modal premium is Rs. 5000, of which the risk premium component is Rs.100. Then service tax (inclusive of education cess) applicable will be Rs. 12.36 (12.36% of risk premium). If it is assumed that the unit value is Rs. 6.18. Then the number of units cancelled against Service Tax would be 2.

Term Policies

Service Tax payable - 12% of the risk premium
Education Cess - 2% on the service tax
SHE - 1% on the service tax

In Term Policies the service tax and educational cess have to be paid along with the premium. Since in Term policies there is no savings element the service tax is charged on the total premium..

For Example : Modal Premium is Rs. 1000 then the service tax (inclusive of education cess and SHE) applicable will be Rs. 123.60 (@12.36%). Hence the total premium payable would be Rs. 1123.60

Term plans with Return of Premium

Service Tax payable - 1% of the entire premium
Education Cess - 2% on the service tax
SHE - 1% on the service tax

In these policies the service tax and educational cess have to be paid along with the premium.

For Example : Modal Premium is Rs. 1000 then the service tax (inclusive of education cess and SHE) applicable will be Rs.10.30 (@1.03%). Hence the total premium payable would be Rs. 1010.30

No service tax will be levied for policies where no risk premium is deducted. For e.g. Pension plans without life cover etc.

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4. Does the government authorize the insurer to pass on the service tax liability to the customer?
The coverage provided by a life insurer to a policyholder in relation to risk cover is considered as a taxable service. Service tax is an indirect tax, and hence is passed on to the ultimate consumers. As mentioned above the Act makes it obligatory for a person providing services to levy and collect service tax.
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5. Is the service tax rate subject to change? Besides the S.Tax, will there be any other levy which might increase my premium ?
At present the law provides to charge only service tax , educational cess and SHE at prescribed rates. These rates are determined by the Government and is subject to change. In future there can be other taxes/charges also and if so directed by the law the same may be passed on to policyholders.
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6. How is service tax recovered in unit-linked policy?
In ULIP policies the service tax and educational cess payable is recovered by cancellation of units of equal amount from the policy fund. This means that the customer need not pay an amount over and above the premium under the policy. We have started charging the service tax for UL policies since June 2005.
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7. Do I need to pay the service tax for my past premiums? Will BSLI recover the service taxes paid by them for the previous years in the future from us?
The service tax is payable for all the future premiums only. However if there are past premiums due but unpaid, service tax will now be applicable. The reinstatement quotation is being amended to this effect. The service tax for the past premiums paid by the customers has already been borne by BSLI and hence will not be passed on to the customers.
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