The cost of life insurance and healthcare may go up with Budget 2011 bringing services offered by hospitals and life insurance companies under the service tax regime.
The move is expected to result in a higher premium for all kinds of insurance products barring term plans—including products such as endowment and pension plans—as the companies are likely to pass on the additional cost to buyers.
“There is a service tax on traditional policies even now on the risk cover. Currently, it is at 1%. However, according to the Budget proposal, this service tax will increase to 1.5% as is the case of Ulips (unit-linked insurance products),” said Rajesh Sud, managing director and chief executive, Max New York Life Insurance Co. Ltd. “It will be levied on the entire premium in case of traditional policies.”
Sud said the move went against the general expectation that finance minister Pranab Mukherjee will provide more tax incentives to promote long-term savings and insurance.
Kartik Jhaveri, founder and director, Transcend Consulting, a private financial planning and wealth management firm, also said the move was unanticipated.
“Insurance companies are likely to pass at least a part of the burden on to consumers,” Jhaveri said. “The move may also prove advantageous to mutual fund companies.”
P. Nandagopal, managing director and chief executive at IndiaFirst Life Insurance Co. Pvt. Ltd, said the impact of the proposed changes would likely be marginal.
“The tax will not be levied on the entire premium and hence, the impact will be less,” Nandagopal said. “But taxing of the investment component is a tedious process and we have to wait for the final guidelines for calculating the actual impact on policy holders.”
Healthcare costs are also set to rise, with Mukherjee bringing all services provided by hospitals with 25 or more beds and with air-conditioning in the service tax net.
Until now, service tax on hospital services was charged only from customers whose payments were made through an insurance company or a business entity. But the budget proposes that the tax also be levied on customers who pay themselves.
The service tax rate remains 10% but a 50% abatement means the effective rate will be 5%.
The step removes an anomaly in the tax structure.
“Earlier there was a service tax levied on cashless facility on health insurance policies. So while a customer who paid for hospitalisation expenses did not pay any service tax, an insured individual availing the cashless benefit would have to pay a service tax,” said Bhargav Dasgupta, managing director and chief executive, ICICI Lombard GIC. “This budget has done away with that anomaly. However the bad news is that healthcare costs in India will increase.”
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S Naren, CIO-Equity
• The budget did not outline anything on a separate tax exemption limit for life insurance. We expected a separate limit of Rs.50,000 for life insurance premiums.
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Amitabh Chaudhry, MD and CEO, HDFC Standard Life
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MD Mallya, CMD, Bank of Baroda
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