Finance minister lends a friendly hand to the ULIP and milks more service tax revenue from other In this age of liberalisation and global policies, the role of the regularity authorities becomes far more crucial. Unit Link Insurance Policy- ULIP is a product of liberal policies of the government and came into play in the 1960s. It is popular in many countries around the globe. The reason that is attributed to the widespread popularity of ULIP is its transparency and the flexibility, it offers. Life insurance solution provides for the benefits of protection and flexibility in investment. However, the regularity authorities, Irda and Sebi have recently locked their horns on a new controversy. The finance minister himself had to intervene to resolve the issue as Sebi banned issuance of new Unit-Linked Insurance Plans. SEBI had instructed many private insurance companies, like SBI Life, ICICI Prudential Life and Reliance Life Insurance, HDFC, etc. not to issue any more ULIP products. The irony lies in the fact that the same finance minister, in this year Budget, proposes to amend certain provisions of the Service Tax so that more revenue can be milked from ULIP. Investment Management under ULIP Services was brought under the purview of Service Tax with Effect from May 16, 2008. However, recent changes, proposed in the Finance Act, 1994 will result into more tax from this sector. There is no iota of doubt that Unit Linked Insurance Plan has been an area of immense ambiguities as it is a financial product that offers life insurance as well as an investment like a mutual fund, broadly similar to the mutual funds. The only difference is that in case of ULIP certain amount of premium is earmarked towards the life insurance of the plan holder and the rest is used for investment in the stocks. Moreover, unlike in the mutual fund industry, where the funds are managed by an independent asset management company (which is a separate legal entity), ULIP's funds are managed by the insurance company itself. The Finance Act defines any service provided or to be provided to a policy holder, by an insurer carrying on life insurance business, in relation to management of investment, under unit-linked insurance business, commonly known as Unit Linked Insurance Plan (ULIP) scheme is a 'taxable service'. The moot area of controversy is the valuation aspect as it is difficult to ascertain the component of the total charges that is attributable to the management of investment. The definition had an explanation to the same stating 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. Budget 2010 continues to add on to controversies as the ministry proposes to substitute the old explanation with a new one stating that the gross amount charged by the insurer from the policy holder for the said service provided or to be provided shall be equal to the maximum amount fixed by the Irda established under section 3 of the Insurance Regulatory and Development Authority Act, 1999, as fund management charges for unit linked insurance plan or the actual amount charged for the said purpose by the insurer from the policy holder, whichever is higher. The ministry vide its DOF No. 334/1/2010-TRU dated February 26, 2010, clarified that the amount appropriated by the insurance company is not only asset management but for various activities, such as Premium Allocation Charge i.e. 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 initial expenses in marketing the issue, including commission, paid to distributors and cost of conducting medical check up of the ULIP holder and other miscellaneous charges. It also includes 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 and 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. Apart from this, there are fund management charges 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 Irda at 1.5% of the gross yield for schemes below 10 years, and 1.25% for schemes above 10 years. As 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. 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. Thus, even if ULIP violates any of the regulations governing the fund management charges by recovering additional amounts from the policy holders in guise of fund management charges or otherwise, this new proposal ensures that service tax is recovered on the same. So on one hand, the finance minister lends a friendly hand to the ULIP and with the other milks more service tax revenue.
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