The cost of non-life insurance policies may come down as the government is set to allow firms providing both taxable and exempt insurance services to take input tax credit proportionate to the taxable services they render.

Currently, irrespective of the share of taxable services in a firms portfolio, input tax credit in such cases is capped at 20%. The balance service tax obligation is discharged through cash payment. The practice has resulted in large accumulation of unutilised credit with insurance majors, inflating, in many cases, the cost of policies to the consumer.

Private non-life insurers ICICI Prudential, Bajaj Allianz, Birla Sunlife, ICICI Lombard and Tata AIG and public sector LIC and New India Assurance will benefit from the finance ministrys move to accord them full input tax credit facility.

According to official sources, the insurance firms will have to segregate accounts in regard to inputs going into taxable and exempt services for full input tax credit. Of course, to a large extent, it is a matter of procedure whether the tax is paid through credit or cash. The insurer is anyway free to transfer the burden to the consumer either as cost or as tax incurred, as the case may be.

However, it is reckoned that a reduction in tax paid through cash will lend the industry extra liquidity which, in turn, will enable it to cut prices to push volumes, looking at long-term rewards. The domestic non-life insurance segment reported a size of $4.4bn in 05-06, up 16% over $3.8bn the year before, thanks to robust growth in automobile and health insurance segments.

Indeed, non-taxable non-life insurance services are few as compared to taxable services. Exempt services accounted for just 10-30% of the basket of non-life insurance products unveiled by insurance majors. The government had randomly estimated that any credit demand in excess of 20% of the tax liability of a non-life insurance firm would be attributable to input taxes that had actually gone into an exempt service.

The input services of the insurance industry could include telecom, advertising, courier services.

In the case of the excise duty, clearance of exempted goods from a factory which produces taxable goods also is allowed on payment of 10% of the value of the goods in lieu of input credit.

Officials said that while the number of excise-exempt goods are limited, there are still a large number of services that go as input services to goods or value added (exempt) services.
This, they said, was one reason for imposing curbs on the use of credit in such cases, in addition to practical difficulty in accounting.