Insurance companies have all along been enjoying an edge over asset management firms by selling unit-linked insurance products (Ulips) that bundle insurance and investment in equities but not paying service tax for investment management. Neither do the investors in Ulips need to mandatorily quote their permanent account number (PAN) for investing in such instruments.
The Budget has paved the way for creating a level playing field for the asset management firms vis-a-vis life insurance companies by making PAN compulsory for all financial transactions and imposing service tax on investment management services rendered by insurance firms.
“It’s certainly a positive move. However, the bigger concern is that insurance policies continue to be sold as capital market instruments. They are not taxed in a similar manner and the commission structures of mutual fund and insurance agents are very different,” said Ved Prakash Chaturvedi, managing director of Tata Asset Management Ltd.
Asset management firms face a cap on the expenses they can charge to investors in mutual fund schemes and hence they do not have the flexibility to give higher commissions to mutual fund distributors.
Sameer Kamdar, country head for mutual funds at Mata Securities, says the actual level playing field will be achieved only when there is a common set of procedures and rules for all financial products, including mutual funds and insurance policies.
The insurance players, on their part, argue the Budget has put them on an “inequitable platform.”
Pointing out an “anomaly” in the finance minister’s speech and the Budget document, Bert Paterson, managing director, Aviva Life Insurance Company India Ltd, said the “illustration in the Budget document” indicates they have to pay this tax on all services and not just investment management services.
Nitin Chopra, managing director and chief executive officer of Bharti AXA Life Insurance Co. Ltd, feels that the Budget proposal results in different tax structures for customers of Ulip and non-Ulip investment plans and could increase the total cost for those who invest in Ulips.
“While the traditional insurance plans allow for investment, they do not provide a transparent structure to the overall building of the corpus over the term of the policy. However, Ulips offer a transparent option for customers to plan their various lifestage needs through market-led investments,” he said.
Chopra added that by individually bringing the various components under the service tax net, the Budget has taxed the transparency of the Ulip product structure, amounting to higher incidence of taxation for customers.