3.1 Tax on insurers issuing Unit Linked Insurance Plans (ULIP) was imposed w.e.f. 1-06-2008. The taxable service is the “Management of investment, under unit linked insurance business, commonly known as Unit linked Insurance Plans (ULIP) scheme” by an insurer carrying life insurance business.
3.2 ULIPs are broadly similar to the mutual funds, except that they are required to segregate a certain part of the premium towards the life insurance of the plan holder. Further, unlike in the mutual fund industry, where the funds are managed by an independent Asset Management Company (which is a separate legal entity), in case of ULIP the funds are managed by the insurance company itself. Thus, it is difficult to ascertain the component of the total charges that is attributable to the management of investment.
3.3 Accordingly, for the purpose of valuation for charging of service tax, an Explanation was prescribed which in brief, explained that the taxable value for the purpose of this service is the difference between the (a) premium paid by the policy holder for the Unit Linked Insurance Plan policy; and (b) the sum of premium paid for or attributable to risk cover, whether for life, health or other specified purposes, and the amount segregated for actual investment. In other words the differential amount was considered as the charges for asset management.
3.4 It is however a fact that the amount appropriated by the insurance company is not only asset management but for various activities, such as,-
a) Premium Allocation Charge: is an upfront deduction from the policy premium, which is generally more than 10% in the first year of ULIP, and continues to be very high for the initial three years. This amount is used for following purposes:
i) Initial expenses in marketing the issue, including commission paid to distributors.
ii) Cost of conducting medical check up of the ULIP holder and other miscellaneous charges.
b) Policy administration charges; monthly charges for managing the paperwork and other formalities for the insurance, and are not related to asset management. It is chargeable to service tax under insurance services.
c) A number of other charges are also charged by the insurance companies, which, inter alia, include, policy surrender charges, switching charges, partial withdrawal charges, miscellaneous charges etc.
d) Fund management charges: This is the amount charged by the insurance company for managing the investible funds, which is intended to be taxed under this service. This amount has been capped for ULIPs by Insurance Regulatory and Development Authority (IRDA) at 1.5% of the gross yield for schemes below 10 years, and 1.25% for schemes above 10 years.
3.5 Since the charge pertaining to asset management alone should form the value for taxable purpose, the explanation provided under the definition of the taxable service is being suitably amended to provide that that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by IRDA, whichever is higher.
3.6 The method of computation for monthly payment of tax by such service providers, would be prescribed at the appropriate time.
3. Unit Linked Insurance Plans
3.1 Tax on insurers issuing Unit Linked Insurance Plans (ULIP) was imposed w.e.f. 1-06-2008. The taxable service is the “Management of investment, under unit linked insurance business, commonly known as Unit linked Insurance Plans (ULIP) scheme” by an insurer carrying life insurance business.
3.2 ULIPs are broadly similar to the mutual funds, except that they are required to segregate a certain part of the premium towards the life insurance of the plan holder. Further, unlike in the mutual fund industry, where the funds are managed by an independent Asset Management Company (which is a separate legal entity), in case of ULIP the funds are managed by the insurance company itself. Thus, it is difficult to ascertain the component of the total charges that is attributable to the management of investment.
3.3 Accordingly, for the purpose of valuation for charging of service tax, an Explanation was prescribed which in brief, explained that the taxable value for the purpose of this service is the difference between the (a) premium paid by the policy holder for the Unit Linked Insurance Plan policy; and (b) the sum of premium paid for or attributable to risk cover, whether for life, health or other specified purposes, and the amount segregated for actual investment. In other words the differential amount was considered as the charges for asset management.
3.4 It is however a fact that the amount appropriated by the insurance company is not only asset management but for various activities, such as,-
a) Premium Allocation Charge: is an upfront deduction from the policy premium, which is generally more than 10% in the first year of ULIP, and continues to be very high for the initial three years. This amount is used for following purposes:
i) Initial expenses in marketing the issue, including commission paid to distributors.
ii) Cost of conducting medical check up of the ULIP holder and other miscellaneous charges.
b) Policy administration charges; monthly charges for managing the paperwork and other formalities for the insurance, and are not related to asset management. It is chargeable to service tax under insurance services.
c) A number of other charges are also charged by the insurance companies, which, inter alia, include, policy surrender charges, switching charges, partial withdrawal charges, miscellaneous charges etc.
d) Fund management charges: This is the amount charged by the insurance company for managing the investible funds, which is intended to be taxed under this service. This amount has been capped for ULIPs by Insurance Regulatory and Development Authority (IRDA) at 1.5% of the gross yield for schemes below 10 years, and 1.25% for schemes above 10 years.
3.5 Since the charge pertaining to asset management alone should form the value for taxable purpose, the explanation provided under the definition of the taxable service is being suitably amended to provide that that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by IRDA, whichever is higher.
3.6 The method of computation for monthly payment of tax by such service providers, would be prescribed at the appropriate time.
The above changes will come into effect from a date to be notified, after the enactment of Finance Bill, 2010.