The Directorate of Service tax has issued show-cause notices to all life insurance companies, including Life Insurance Corporation and ICICI Prudential, for sidestepping service tax by claiming excess input credit.
The notice has also charged the companies with willful suppression of facts and imposed a penalty.
According to government officials, the claim against LIC alone is around Rs 250 crore (Rs 2.5 billion). The directorate is turning the heat on insurance companies as the tax mop-up from them has shown a decline during 2005-06.
Life insurance companies are likely to contest the service tax directorate's claims, and their chief financial officers are to meet next week to decide on a counter, an insurance company official said.
Officials said the notices have been issued following instances of insurance companies claiming credit up to 100 per cent of the total liability of the taxable service.
The contention of the directorate is that the companies can claim credit only up to 20 per cent of the total liability in cases where the service has a taxable and a non-taxable component and where the tax liability cannot be easily apportioned.
Insurance companies are liable to pay service tax only on the risk component of the life insurance policy premium and not on the investment component. However, the directorate feels that companies are claiming input credit after including even the exempted portion of the premium while calculating their tax liability.
Tax experts contend that the demand of the directorate is not valid as insurance firms have been specifically exempted from the 20 per cent stipulation.
The insurance firms claim input credit on the commissions paid to insurance agents. Insurance agents who get the commission are liable to pay service tax as they are covered under insurance auxiliary services. However, this tax is not paid directly by them but borne on their behalf by the parent insurance firm. It is this cost which is claimed by the insurance firms as input credit.
The revenue department had up till last week collected only Rs 22,800 crore (Rs 228 billion) as service tax against a revised Budget estimate of Rs 23,000 crore (Rs 230 billion). Service tax from insurance accounts for a significant share of the service tax proceeds.
The government had estimated collection of Rs 1,623 crore (Rs 16.23 billion) by way of service tax from insurance sector during 2005-06.
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