Introduction:
Many uncertain events happen in a person’s life which causes different types of risk to his life and property. Therefore, a need for protection arises and that’s where the concept of insurance comes into the picture. An insurance contract is a contract in which there are 2 parties “insured” and “insurer”. The insurer must indemnify the insured in case of any contingency provided he has paid the consideration in the form of a Premium.
The Insurance Act of 1938 defines Life Insurance Businesses are: –
“The business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include—
(a) the granting of disability and double or triple indemnity accident benefits, if so, provided in the contract of insurance,
(b) the granting of annuities upon human life; and
(c) the granting of superannuation allowances and 1 [benefit payable out of any fund] apply solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade, or employment or of the dependents of such persons;]
[Explanation. — For the removal of doubts, it is hereby declared that “life insurance business” shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer]”
Thus, life insurance is a contract between an insurance policyholder and an insurer, where the insurer promises to pay the beneficiary/insured a sum of money upon the death of the insured person or happening of the event covered under the contract.
Treatment of Insurance under Service Tax
Under the old indirect tax, a 15% service tax was levied on the value of considerations which is being charged by the insurer from the insured in the form of a premium. Well, section 65(105) (ax) of the Finance Act 1994 defines Taxable Services (about insurance business) as any service provided or to be provided to a policyholder or any person, by an insurer, including re-insurer carrying on life insurance business about risk cover in life insurance.
Under section 67 of Finance Act 1994 provisions of valuation are prescribed.
1. In a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him
2. In a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration
3. In a case where the provision of service is for a consideration that is not ascertainable, be the amount as may be determined in the prescribed manner.
4. In the case where the provision of service is for a consideration that is included tax amount, the value of taxable services shall be the consideration that is charged including that tax component.
5. Some adjustments are required to be done while calculating the taxable value of service which are as follows.
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- Any expenditure which was incurred by the service provider in the course of services shall be included in the taxable value of services.
- Any expenditure which is incurred by the service provider as a pure agent of the recipient of service that shall not be added while calculating the taxable value of services.
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Treatment under GST: Life insurance plans are a mix of risk cover as well as investment cover other than the pure term insurance products that are completely towards the risk portion. Owing to this peculiar nature of life insurance contracts, the valuation of life insurance supplies has been given differential treatment while arriving at the value on which GST is to be charged. In the case of a supply of life insurance services, the taxable value of supply is determined by the provisions contained under section 15(5) of the Central Goods and Services Tax Act, 2017 , read with Rule 32(4) of CGST Rules, 2017.
Section 15(5) of CGST Act 2017 “Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed”
As per Rule 32(4) of CGST Rules 2017, the valuation provisions are as under:
- In case of a policy where a certain amount of premium is towards investment then in that case taxable value shall be the amount of gross premium charged less that investment amount provided that investment amount is intimated to the policyholder at the time of supply of service. ULIP Plans come under this category
- Single Premium Policies in which a policyholder pays a lumpsum premium upfront and gets assured death benefit. In such policies value of taxable service is 10% of the premium charged from the customer. Normally Annuity policies are covered under this category.
- In the case where the whole amount of the premium is towards risk cover the case entire premium will be considered as the taxable value of service. Just like in the case of the Term Plan where no investment option is there and the claim amount will get only after happening of the event, in case of the nonhappening of event nothing will be given.
- Any other policies except above the taxable value shall be 25% of the premium in 1st year of the policy and 12.5% of the premium in subsequent years just like in the Endowment Policies. In such policies, insurers pay all benefits that accrued up to the policyholder outliving the term under the policy.
Conclusion: Over the last 20 years insurance sector has evolved in a way that it does not limit itself to only risk coverage but also extended to saving benefits. On the same line Indirect tax regime has also changed earlier Service Tax was levied only on risk cover but now GST tries to cover every aspect of it.
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