CENVAT credit availment by life insurance companies reg. - Service Tax - F. No.354/9/2011 - TRU

F. No.354/9/2011 - TRU Government of India Ministry of Finance Department of Revenue Central Board of Excise Customs New Delhi Dated: July 12, 2011 Subject: CENVAT credit availment by life insurance companies reg. While reviewing the performance of insurance companies it was observed that the service tax liability has been largely discharged by them using CENVAT credit. Further these companies have accumulated huge balance of CENVAT credit. 2. Till the budget of 2011, as per Section 65(105(zx) of the Finance Act, 1994 taxable service means any service provided or to be provided to a policy holder or any person, by an insurer, including re-insurer carrying on life insurance business in relation to the risk cover to life insurance. With effect from 01.05.2011, the words "in relation to the risk cover to life insurance" stand deleted. Thus, Insurance companies providing life insurance were till 01.05.2011 required to pay service tax only in relation to the risk cover to life insurance and therefore, they could have availed CENVAT credit only to the extent of providing the said service. Whereas, these insurance companies were also providing other services relating to investment/savings, which were not chargeable to service tax and have since been charged w.e.f. 01.05.2011. Thus, these 'other services' were exempted services till 01,052011. Consequently, the said companies were providing taxable as well as exempted services till 01.05.2011, attracting, thereby the provisions of Rule 6 of CENVAT Credit Rules . 3. As per Rule 6 (1) of the CENVAT Credit Rules 2004 , the CENVAT credit is not allowed on such quantity of inputs used in or in relation to the manufacture of exempted goods or for provision of exempted services or input service used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services, except in the circumstances mentioned in sub rule (2). Further, Rule 6(2) ibid provides that where a provider of output service avails CENVAT credit in respect of any inputs or input services and provides such output service which are chargeable to tax as well as exempted services, then the provider of output service should maintain separate accounts regarding receipt and use of such inputs and input services. In case they do not maintain separate records, then as per the provisions of Rule 6 (3) these assesses should have utilised CENVAT credit to the extent of an amount not exceeding 20 % of the amount of service tax payable on the output service, upto 31,03.2008. While for the period, 1.4.2008 to 06,07.2009, the service provider was required to pay an amount equal to eight percent of the value of exempted services being provided by them, for the period 07.07.2009 to 31.03.2010, the payment was to have been made at rate of 6% and for the period 01.04.2010 onwards, the payment on the same was to be made at the rate of five percent It appears that this obligation has not been met by the service providers. On the other hand, the said companies have been availing the entire CENVAT credit on the input services being received by them and utilising the same. However full credit will be available for services specified in Rule 6 (5) ibid including in respect of sub-clause (zy) of clause 65 (105) i.e. insurance auxiliary service for the period till 31.03.2011. 4. The plea of taxpayers that payment at the rate of 1% on the total premium implies that they have paid service tax on the 'investment' services also is not tenable, as the method of '1% on the total premium' is used only for the purpose of quantification of the service tax that is payable on the taxable service. This method cannot bring under the tax net what was not within the ambit of Section 65 (105) (zx) till 01.05.2011. Thus CENVAT credit availed which was utilised towards provision of the exempted services stands recoverable and needs to be recovered. It may also be verified whether tax liability has been determined @ I % of the gross premium or at a lesser rate in terms of only the risk portion determined based on a certificate from an actuary, without adding all the remaining overheads. 5. The above aspect in respect of such companies should be audited / investigated expeditiously and all pending cases on the issue should be decided at the earliest. Urgent action needs to be taken to safeguard Government revenue: Results achieved may please be intimated to the Board. (R K Kapur) OSD (Service Tax) CBEC, New Delhi