In a relief to insurance companies, the finance ministry has revoked its demand asking insurers to pay service tax on commission they receive from reinsurance companies. The Central Board of Excise and Customs (CBEC) has clarified that service tax cannot be levied on the reinsurance commission because an insurance company does not provide any service to a reinsurance company.
Insurance companies are required to reinsure a part of the sum assured with reinsurance companies. This way, they transfer some risk on the sum assured to another entity (reinsurer) on payment of a portion of the premium. Reinsurance companies share back a part of the premium with insurance companies as the latter has to bear higher administrative costs and other expenses.
Tax officials had issued showcause notices to insurance companies for paying service tax on the reinsurance commission, which, they said, was for promoting the business of the reinsurer. The demand notices, issued for the first time last year for service tax payment between 2004-05 and 2008-09, said the commission was liable to service tax under ‘Business Auxiliary Services’ head.
Insurers took up the matter with CBEC, which issued a circular recently and clarified the arrangement between the two was for sharing expenses. It also said reinsurance commission, despite being labelled commission, did not exactly have the nature of a commission.
“In fact, it is the reinsurer which provides insurance service to the insurance company. As both the insurance company and reinsurer pay service tax on the entire amount of premium charged by them, the question of charging service tax under any other taxable service does not arise,&” the circular said.
Nishant Shah, partner, Economic Law Practice, said it could not be called a commission for promoting reinsurer’s business because policyholders of insurance companies did not know about the insurers. “They are just sharing the costs as administrative costs of insurance companies are high,&” he added.
The Income Tax Appellate Tribunal had also ruled that the reinsurance commission was not paid for soliciting or promoting another’s business and that it was a compensation for cost of the ceding company.
Relevant Circular is as Follows:-
Circular No. 120(a)/2/2010-ST
F.No.332/29/2009-TRU
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs
(Tax Research Unit)
*****
Room No. 147-A, North Block,
New Delhi-110001 dated the 16th April, 2010.
To
Director General of Service Tax, Mumbai
Director General of Central Excise Intelligence, Delhi
Chief Commissioner of Central Excise (All)
Chief Commissioner of Customs and Central Excise (All)
Commissioner of Service Tax (All)
Madam/Sir,
Subject: Service tax on re-insurance commission – regarding
In terms of Section 101A (Part IV-A) of the Insurance Act, 1938, every insurer dealing in insurance business is required to re-insure a specified percentage of sum assured with another insurance company.
2. The insurance company pays premium to the reinsuring company for this service. However, a part of such premium is deducted and kept by the insurance company for meeting the administrative expenditure. In other words, the insurance company and the re-insurance company jointly bear the expenses for running the insurance/reinsurance business. This shared expense is commonly known as ‘commission’ though strictly it is not in the nature of a commission. It may be pertinent to mention that the customer/beneficiary deals only with the insurance company and may not even be aware of the role of re-insurer and the backroom operations between the insurance company and the reinsurer.
3. As per the provision of the Finance Act, 1994, insurance as well as reinsurance are subject to service tax. The Board has received representations that notices have been issued demanding service tax on the amounts deducted by the insurance company (in other words paid by the reinsurance company) on the ground that it is the consideration for the insurance company providing business auxiliary service (BAS) to the re-insuring company. The notices alleged that the insurance companies are promoting the business of re-insurers thereby providing them the BAS.
4. The issue has been examined. As explained in para 2 above, the arrangement between the insurance company and the reinsurer is only sharing of expenses and there is no service provided by the insurance company to the re-insurer for a consideration. Since the policy holder may not even be aware of the operations of the re-insurer, it cannot be said that the payment made by the re-insurer to the insurance company is for its business promotion or a service on behalf of the re-insuring company (i.e. Business Auxiliary Service). In fact, it is the reinsurer which provides insurance service to the insurance company. As both the insurance company and reinsurer pay service tax on the entire amount of premium charged by them, the question of charging service tax under any other taxable service does not arise.
5. The Board desires that all pending cases on this subject may be decided keeping in view the above clarification.
Yours faithfully,
(Gautam Bhattacharya)
Joint Secretary (TRU-II)
Tel: 23093027
