While Budget 2008 has not mentioned anything about service tax on insurance commissions, Life Insurance Corporation is considering passing on the tax burden to its agents or customers, according to sources in the public sector insurer.

Life insurance companies, both government and private, had sought reduction in the current service tax rate of 12.5 per cent.

LIC [Get Quote] has been absorbing liabilities arising out of service tax on agent commissions, leaving its 13 lakh agents free off this burden. A senior LIC official said that LIC's new business premium income was Rs 55,395 crore (Rs 553.95 billion)during 2006-07.

Considering that the average commission per policy is at 10 per cent, the corporation would have paid around Rs 5,500 crore (Rs 55 billion) as the commission of the agents. Here, the service tax at 12.5 per cent works out to about Rs 700 crore (Rs 7 billion), which has been borne by the the insurer on behalf of the agents.

This figure is only for NBP income and if the commission on policy renewals is added, the service tax burden would be much higher for LIC, the official added.

With gradual increase in service tax rates, it may not be possible for LIC to absorb the service tax burden in full.

"Going forward, we may have to pass it on to our agents or customers, either a portion of it or full. In this era of intense competition, we cannot afford to lose our customers by giving them less bonus. So, we might end up passing on the burden to the agents," the senior official added.

He added that from April to December 2007, LIC collected NBP of Rs 34,595 crore (Rs 345.95 billion), which is likely to go up to Rs 60,000 crore (Rs 600 billion) by the end of the current financial year. A 10 per cent commission for this amount works out to Rs 6,000 crore (Rs 60 billion). And, the service tax amount works out to Rs 750 crore (Rs 7.5 billion) at the rate of 12.5 per cent.

However, in the case of private insurers, the service burden has been passed on to the agents. During 2006-07, private insurers collected NBP income of Rs 19,471 crore (Rs 194.71 billion) for which commission worked out to about Rs 3,000 crore (Rs 30 billion). The service tax amount of Rs 350 crore (Rs 3.5 billion) was born by the agents.

It is also estimated that life insurance companies, including LIC, are likely to collect NBP of Rs 1 lakh crore (Rs 1 trillion) during the current financial year, on which commission of 10 per cent will be levied (to around Rs 15,000 crore or Rs 150 billion). On this commission, life insurance companies will have to shell out Rs 10,000 crore (Rs 100 billion) as service tax.

A senior official with a private life insurance company pointed out that insurers will now face the challenge of retaining their agents. Insurers are trying their best to keep attrition levels low by giving incentives directly and indirectly. If the service tax burden is passed on to the agents, it will affect their income levels, which may lead to higher attrition, say industry watchers.