LIC gets huge demand from Service Tax
It is understood that show-cause notices amounting to Rs. 264 crores (LIC -223 crores, balance to others) have been issued to Life Insurance companies namely, LIC, HDFC Standard Life, Birla Sunlife, Tata AIG, ICICI and SBI Life for misusing CENVAT credit. The immediate provocation must be that the department has realized that due to the availability of huge overflowing credit, the Service Tax collection on this insurance is NIL. The details of misuse alleged by the department are as follows:
1) Life Insurance Companies are paying service tax on 'Risk cover premium' of life insurance business. They are also made liable under Rule 2(d) of the Service Tax Rules 1994 for payment of service tax under Insurance Auxiliary service on commission paid to life insurance agents. It has been noticed that Tata AIG, HDFC and Birla Sunlife are utilising CENVAT credit availed by them on their various inputs, for payment of service tax on commission paid to their agents. In terms of definition of 'output service' contained in the CENVAT Rules, 2004, the commission paid to insurance agents cannot be treated as their output service as they are providing other taxable service i.e. risk cover. Only if they are not providing any other taxable service, agency can be treated as output service. As credit can be utilised for payment of tax on output service, the utilisation of credit by these 3 companies is not legal.
But the explanation to Rule 2(p) of the Cenvat Credit Rules says,
Explanation.- For the removal of doubts it is hereby clarified that if a person liable for paying service tax does not provide any taxable service or does not manufacture final products, the service for which he is liable to pay service tax shall be deemed to be the output service.
So the condition for the service on which he pays tax to be treated as output service is that
He does not provide any taxable service
OR
He does not manufacture final products.
Please note that it is OR not AND. So if the tax payer is not a manufacturer or a service provider – not both, the service for which he is paying tax should be treated as his output service and so he should be allowed to use the credit to pay the tax. Any way this confusion is now removed. So the litigation will be for the past period.
2. It has been noticed that all the companies are providing certain exempted/non-taxable services i.e schemes having no risk cover and other non-taxable services. These companies are maintaining common account of inputs for both taxable and exempted services. In terms of Rule 6(3) (c) of the CENVAT Rules, 2004, these companies are entitled to utilise credit to the extent of an amount not exceeding 20% of tax payable. The assessees are availing CENVAT credit of tax paid on agents commission which is quite high as that is paid @10-30% of total premium whereas tax is paid on risk cover portion of life insurance business. It has been found that assessees are utilising 100% CENVAT credit for payment of tax, which results in zero service tax payment on life insurance business. Assessees are taking shelter of Rule 6(5) which allows full credit of tax paid on specified 16 services (Life insurance agent is one of the specified services). The Rule 6(5) allows full credit, but it does not override the restriction of 20% utilisation contained in Rule 6(3)(c). Therefore, utilisation of 100% credit by these companies is not legal.
This is hair splitting at its best. Just recap the provisions.
If credit is taken on inputs or input services, which are used in taxable as well as exempted services, then ( as per Rule 6(2) and (3)
1. separate accounts are to be maintained
2. If separate accounts are not maintained, when tax is paid, only 20% can be paid from the Credit account.
But there is a sub rule 5 which says that the whole of the credit can be allowed in respect of certain services. The department agrees that Life Insurance Agent is one of those specified services. But the contention of the department is that as per Rule 6(5), full credit will be allowed, but as per Rule 6(3)(c), utilization will be only 20%. If that is so what is the use of Rule 6(5)? The assessee can any way take full credit without this sub rule. Is the rule redundant? Before starting such huge disputes, shouldn’t this be examined by the Law ministry and the Board or should the support system to consultants continue?