Suresh Kumar (CRM Consultant) 04 November 2009

Robbery in the Name of Service Tax

This is regarding the mode of deduction of Service Tax on applicable charges by certain insurers.

My contention

Deduct service tax from the customer's premium, if applicable, and pay the government. Simple.

Is Service Tax payable to the government in kind?

No. Service Tax must be payed by the service provider in cash on or before the 5th of the next month that occurs immediately after the month the amount payable was dedcuted from the customer.

What Some Insurers Do

Deduct equivalent alloted units (these premiums are invested in MF style funds) of the customer for ST payable on premium

Is that OK?

Ofcourse not. For 2 reasons;

1. The insurer does not pay the government in fund units. He keeps the units and pays the money to the government. What happens to the units? They appreciate in value and the insurer benefits out of it.

2. The government stipulates that the exact amount of ST applicable at prevailing rates be paid. So if you are gonna pass that on to the customer, deduct cash from the premium paid for this charge on the date the policy commences

Is this practice mentioned in the policy document?

No! There is no mention of the quantum of Service Tax applicable in the document or the company website and there is no mention of the fact that alloted fund units will be deducted for accounting for ST applicable on the premium allocation charge

Is this practice not illegal?

Ofcourse, it is illegal. The insurer, without notifying the customer properly, cancels alloted units to pay for a charge that is levied by the Government of India. In this process he benefits. [As of October, the fund NAV has gone up by 70% and so have the value of the cancelled units]. Using a GoI charge, the insurer benefits maliciously.

Which Service Tax or Direct Taxation law has the insurer broken?

That, sadly, I do not know. I will be grateful to the esteemed and experienced lawyers of this forum, if they point out to me which laws have been broken directly or indirectly by the insurer, considering that:

(a) the insurer, without informing the customer, either by printing it on the policy document or informing him orally, cancels alloted units for paying Service Tax, a levy which is controlled by the Government of India and which, as far as I know, is payable in cash

(b) the insurer benefits from the appreciation of the cancelled units as he retains them, units that rightfully belong to the policyholders, after paying the government in cash

Does the insurer benefit substantially from this practice?

Hell, yes! The insurer's MD has stated that the insurer has 3,60,00 policies on hand and a market share of Rs 1000 crores in premiums.

The value of the units dedcuted was nearly Rs 7000 in Oct while the ST payable by me initially was Rs 3708. That is approximately Rs 4000 netted by the insurer due to appreciation of the value of the units

Even if 1,00,000 policies of the insurer are subjected to such malicious cancellation of units, the insurer must be in the possession of policyholders' units worth anywhere between Rs 35-40 crores.

Do all insurers follow this practice?

No. LIC, Bharti Axa and TATA AIG have clearly mentioned the Service Tax rates applicable and the mode of deduction. Pl have a look at these pages:

https://www.licindia.com/Health_Protection_Plus_features.htm

https://www.bharti-axalife.com/images/faq_ulips221007.pdf

https://www.tata-aig-life.com/CustomerSerivce/ServiceTaxFAQ.htm

Disclaimer:

I'm NOT promoting or recommending any of the above mentioned policies/insurers. Readers who wish to subscribe to the policies of the above mentioned insurers are advised to use their own discretion.

I'm only pointing out these pages for readers to get an idea about how charges and application of those charges are supposed to be documented.

Have you asked for an explanation from the insurer regarding this practice of cancelling units for ST payable?

Yes, I have. Have gone up even to the Managing Director. Since July 17, 2009. And to no avail. No explanation has been provided till date for the insurer's malicious intent.

What, at best, was their justification?

The Manager (Operations) at their HO claimed that he could not provide the information as he did not have the authority to disclose it!!

The Insurer: Shriram Life Insurance Company

The charge in question: Service Tax on premium Allocation Charge

A massive scam is on and I require help, unaided or paid, to fight this practice and bring them to book.

I can substantiate all claims that I have made above in the form of electronic exchanges between me and the insurer. I have copies of the policy statements to prove alloted units have been siphoned off.

As I mentioned earlier, I require the assistance of the experienced lawyers on this forum to know which laws or sections of the law have been broken by the insurer [Is Sec 420 applicable here?]

You can PM me if you require more information

Best Regards

Suresh Kumar

Reply Follow

5 Replies

Vineet (Director) 04 November 2009

Please provide specific details of transaction i.e. premium paid, date and units alloted, Premium allocation charges, date, corresponding units cancelled and applicable NAV and Service tax charged , date, corresponding NAV cancelled and NAV applicable.

Suresh Kumar (CRM Consultant) 05 November 2009

Hi Mr Vineet!

Here are the details:

Policy #1: LN080800213988

Policy #2: LN080900030315

Abbreviations used:

PAC: Premium Allocation Charge

ST: Service Tax

Policy #1: Premium paid: Rs 50, 000 (Date of Commencement of policy: Dec 26, 2008)

Policy #2: Premium paid: Rs 30, 000 (Date of Commencement of policy: Mar 30, 2009)

Funds:

Policy #1: Maximus Gold

Policy #2: Maximus

Premium Allocation Charge: 60% of premium for 1st year and 5% from 2nd year onwards. For both policies. This fact is very clearly mentioned in the policy document.

So Premium Allocation Charge (PAC) (@ 60% of Premium) in Rupees:

Policy #1: Rs 30, 000

Policy #2: Rs 18, 000

Service Tax has been calculated @12.36% for Policy #1 and @10.30% for Policy #2. Perhaps those were the prevailing rates of ST for those periods, I'm not too sure, but that is not important anyway.

For Policy #1, ST on PAC @12.36%:

12.36% of Rs 30, 000 = Rs 3708

For Policy #2, ST on PAC @ 10.30%:

10.30% of Rs 18, 000 = Rs 1854

There is the question of monthly charges, viz, Policy Administration Charge, Fund Management Charge, Rider Premium Charge, Mortality Charge and ST appicable on these charges. For these charges, equivalent units will be cancelled from my allotted units.

The policy document says:

The amount required to meet the charges will be collected by canceling the units to the credit of the life assured every month in advance.

So, even at the time of the beginning of the policy, units equivalent o the respective monthly charges of both policies (monthly amounts in Rupees can be seen in the policy statements) will be cancelled.

For Policy #1, monthly charges have been arrived at Rs 302.59 for the month of Dec 2008

For Policy #2, monthly charges have been arrived at Rs 61.71 for the month of March, 2009

These amounts are mentioned very clearly in the policy statement attached.

In practice, SLIC should have first deducted Rs 3708 for Policy #1 and Rs 1854 for Policy #2 (as ST on PAC) from the remaining premium (of Rs 20, 000 for Policy #1 and 12, 000 for Policy #2) and allotted my fund units for the net premium and then deducted units equivalent to Rs 302.59 for Policy #1 and Rs 61.71 for Policy #2 from the allotted units.

For purposes of illustration, I shall stick with calculations pertaining to Policy #1, else this already lengthy post will become voluminous. The same criteria of misappropriation by SLIC holds good for Policy #2 too.

NAV of Maximus Gold, the fund selected for Policy #1 (as can be seen from the policy statement) on Dec 26, 2008, the date of commencement of the policy, is: 7.1075

What SLIC has done:

Units equivalent to Rs 3708 (ST on PAC) + advance monthly charges of Rs 302.59 have been cancelled from the allotted units.

Units equivalent to Rs 3708 on Dec 26, 2008 @NAV of 7.1075 = 3708 / 7.1075 = 521.702427

Units equivalent to Rs 302.59 on Dec 26, 2008 @NAV of 7.1075 = 302.59 / 7.1075 = 42.573338

Total units deducted = 521.702427 + 42.573338 = 564.275758

Now have a look at the policy statement for Policy #1 and you'll see that 564.2758 units have been deducted right at the beginning from my allotted units.

Now let us have a look at how it actually should have been. SLIC should have deducted Rs 3708 from my remaining premium of Rs 20, 000 for Policy #1.

20, 000 - 3708 = Rs 16, 292

Units of Maximus Gold equivalent to Rs 16, 292 (on Dec 26, 2008 @NAV of 7.1075) = 16292 / 7.1075 = 2292.22652

Units equivalent to Rs 302.59 (on Dec 26, 2008 @NAV of 7.1075) = 42.573338

My net fund units on Dec 26, 2008 will then be 2292.22652 - 42.573338 = 2249.653182

You can see from the policy statement that my net fund units, on Dec 26, 2008, are indeed 2249.6531

But what is the difference? SLIC has NOT deducted cash from my remaining premium for ST on PAC, but has deducted an equivalent number of units. That is, instead of deducting Rs 3708 from the remaining premium for Policy #1, it has deducted 521.702427 units. Why? If this was indeed about paying ST on PAC to the government the simplest thing would have been to deduct the amount in cash from my remaining premium. Why didn't SLIC adopt a straightforward approach towards paying ST on PAC?

Have the units per se been transferred to the government as ST on PAC? No. GoI has to be paid in cash (not kind) and SLIC has paid Rs 3708 as ST on PAC.

Knowing that the government has to be paid only in cash, why would SLIC cancel equivalent units in the first place for paying ST on PAC?

Now, people would say, if SLIC has deducted units worth Rs 3708 from you and paid Rs 3708 to the government, then what is your problem, considering that the net units you end up, in whatever manner SLIC pays for ST on PAC, is ultimately the same.

No, I wouldn't agree. Because here's where the scam begins. How do they do it? Here's how:

Remember that a whopping 60% of my first premium is deducted as Premium Allocation Charge. Even accounting for agent commissions, documentation charges and charges of that sort, enough of it remains with SLIC to pay ST to the government in cash (or they make sure enough remains)

The Fund Management Division of SLIC (responsible for managing the various funds in place) deducts equivalent units of the ST payable on Premium Allocation Charge at NAV prevailing on that day and then informs the Accounts Division of SLIC to advance an equivalent amount of cash because, obviously, the cannot pay the government with units. The Accounts Division does the book balance work and releases the cash to the Fund Management Division. The Fund Management Division then pays the government the ST on Premium Allocation Charge in cash.

This is how it works:
The Fund Managment Division dedcuts ST payable on Premium Allocation Charge (Rs 3708 for one policy of mine) in the form of an equivalent number of my fund units at NAV prevailing on that day, informs the Accounts Division about it.
The Accounts Division receives a document pertaining to the holding of my units and releases the equivalent amount in cash to the Fund Management Division, accounts for the cash advanced and balances the books.
The Fund Management Division collects the cash, pays the ST on Premium Allocation Charge in cash to the government.

So SLIC has paid the tax in time and retained the units.

Any Accountancy student could accomplish that, leave alone a Chartered Accountant.

So, the tax has been paid, the units have been siphoned off and the books have been balanced to account for the units. All of this happens the day my policy commences, because the scheme and the mechanism for misappropriation have been worked out in advance and already put in place. So it is all in a day's work.

As the value of the units shoot up, SLIC laughs all the way to the bank.

The NAV of Maximus Gold as of Nov 3, 2009 is: 11.0487

Value of the units cancelled in the name of ST on PAC for Policy #1 = 521.702427 x 11.0487 = Rs 5764.13353

Amount gained by appreciation of units for Policy #1: 5764.13353 - 3708 = Rs 2056.13353

Similarly, NAV of Maximus, as of Nov 3, 2009 is: 13.9564

Value of units cancelled in the name of ST on PAC for Policy #2 = 179.813204 x 13.9564 = Rs 2509.545

Amount gained by appreciation of units for Policy #2 = 2509.545 - 1854 = Rs 655.545

Total amount gained by SLIC for both policies by appreciation of cancelled units = 2056.13353 + 655.45 = Rs 2711.6785

This is as of today. In October, when the Sens*x had touched 17,000, the total value of the units misappropriated was nearly Rs 4000.

As I mentioned earlier, if this practice was deployed by SLIC for about 1,00,000 of its policies, it stands to gain nearly Rs 30 crores, as of today. Remember, this amount is only the appreciation value after SLIC has paid the ST applicable on PAC to the government.

My guess is that SLIC misappropriates the entire amount and the not the difference alone, as I have mentioned later in my post.

SLIC, as I mentioned earlier, will probably tell me that I have no cause to complain because my net units have not been touched and they are, even today, what they would have been if they had dedcuted ST on PAC in cash from the premium remaining.

But I can trash that argument by saying that the deduction of units for ST on PAC was possible only because I paid the premium in cash. The fund gets paid with my cash and I have every authority to demand an explanation. The fund is built on hard cash from policyholders. The Premium Allocation Charge of 60% of the premium is designed deviously to cover for the ST on PAC in cash so that the misappropriation is possible in the first place. So SLIC, with a malicious intent to benefit, effectively charges me twice for the same government levy, once in cash and once in kind, pays the government in cash and retains the part in kind. The actual value of the misappropriated units must be in the region of Rs 60-70 crores, even today.

This is clearly a felony and no wonder I have not received any clear explanations from their personnel in this regard. I’m forced to post and ask for opinions and advice here as SLIC has failed to come up with an explanation for this even after 3 months of querying them.

I don't know what to add, Mr Vineet- it's already been a longish post. Hope you and other members will be able to point out which Sections of the IPC have been violated by SLIC.

Best Regards

Suresh Kumar

Note: I have attached policy statements for Policy #1- turns out I can attach only one file per post and so I could not upload the other policy statement for Policy #2. This statement is till 15/10/2009

I have removed my address from the policy statement as this is a public post and that is a personal issue. But nothing else has been tampered with.

Current NAV of both funds can be seen from https://www.shriramlife.in

Attached File : 47 47 policy 1.pdf downloaded: 142 times

Vineet (Director) 05 November 2009

Thanks Mr Suresh for such an informed discussion.

Form the details sent by you, I understand that the problem is whther Fund Allocation Charges of 60% are inclusive of Service Tax or not. This you may find out from the Fund offer document.

If, the service tax on FAC is payable additionally, I do not see any mischief in cancellation of equivallent number of units. The units of an open ended mutual fund are non transferable and hence once cancelled, they are not transferred to any other departmet or any other person who may gain from it. In simple accounting terms, to pay the service tax, the fund has reduced equivalent libility towards you and paid cash to the government. In cancellation of units, fund house does not gain anything unless they have charged an entry load while allocating the units. So plase rest assure there is no scam in this and just reverify the service tax aspect on FAC.

On a lighter side, please excuse me for this, you are disturbed on the fact that fund house might have gained due to appreciation in value of cancelled units. There are ample cances and it has happened in past one and half years that NAV of all Mutual Fund Units has actually fallen, resulting in loss to fund house as per your argument.

The Service tax rates wef 26-2-2009 have been reduced from 12.36% to 10.3%.

Suresh Kumar (CRM Consultant) 05 November 2009

Mr Vineet

Thank you for going through the mammoth post- after I was done, the sheer size of it astounded even me.

And thank you for putting forth your views and pointing out the facts. I do not know much about the internal mechanisms of MFs and hence am not aware that the units of OE MFs are not transferable.

I do know that OE MFs are theoretically supposed to go on and on for years and the fund company would have initially started off a few of the investment funds on offer (if not all funds) with it's own capital. In this case, for example, SLIC must have started off with a few investment funds with it's own capital and added money to it from policyholders. So SLIC or any other fund company for that matter must have a percentage stake in the total corpus. This percentage holding probably comes down as fresh money is infused in the form of policyholders' (or investors') premiums and if the fund company chooses not to infuse more money than the initial amount.

But if units are deducted for ST on PAC and, as I mentioned, cash is paid for from the PAC deducted, then the units go to the fund company's/insurer's kitty, right? That is, there is no transfer of the cancelled units here- they are simply added to the company's tally.

Let us assume that you, Mr Vineet, are the owner of a fund and you have started the fund with a substantial capital and later on other investors too join in. Let us assume that I'm one such investor.

Your initial corpus is a percentage stake and the volume of the stake is available in a certain number of units of the fund.

Now, if I owe you some money and have no cash to pay for it and authorize you to cancel the equivalent number of units to my credit in your fund to compensate for the money I owe you, you will do so and add the number of cancelled units to your tally because I have authorized you to do so. [We are also assuming here that you are willing to take the risk of the value of the transferred units depreciating and your suffering a loss as a consequence] You are not transferring or assigning them to a third party in consideration for money but are only transferring the ownership and you, as a major stakeholder and fund manager, have the authority to do that. Does that not constitute a transfer then?

SLIC started off in 2006 and I do not know if they had on offer the same number of investment funds they have today. I'm sure they would have suffered severe blows from mid 2007 through early 2009. But irrespective of the appreciation or depreciation of the units, the company could have continued to add units to its tally by deducting units for ST. There is no denying that.

And that can be done, only if the Premium Allocation Charge (in Rupees) is suitably camouflaged to accommodate payment of the ST to the government in cash. They can then claim that allotted units of the policyholder have been deducted for payment of ST and the policyholder has no cause to complain because the final number of units to the policyholder's credit will be the same even if cash was deducted from the premium to pay for ST.

The policy document only says that Premium Allocation Charge @60% of the premium for the first year and @5% of the premium from the 2nd year onwards will be deducted from each installment of premium paid and the balance will be allocated units of the fund selected by the Life Assured.

I've also asked for a breakup of the way the PAC (60% of my premium) has been spent by SLIC (that is, how much for agent commission, policy initiation, document charges and so on) and I do not hope to get any answer at all for that. Even if they do reply, they can and will attribute the ST payable to some phantom charge, which can quite conveniently and effortlessly be accounted for. I do not think any insurer or fund company will provide information on the way in which they spend initial allocation charges. Accountability is not one of their leading virtues. Even better, perhaps they are not required legally to do so- I’m no lawyer and the lawyers here must know more about this than me.

So SLIC and such fund companies hide behind such technicalities while collecting initial charges and then deduct units claiming to pay ST while cash for that has, in fact, already been collected for covertly from the investor/policyholder.

In this manner the units deducted for ST are transferred to themselves and, irrespective of whether they appreciate or depreciate, their tally keeps going up with the addition of such siphoned off units.

The fund companies / insurers do not even need the authorization required (as mentioned in the example) to transfer policyholders' units.

I do not mean to be arrogant or obstinate, Mr Vineet, but I think the insurer certainly stands to gain from the cancellation of the units, irrespective of their appreciation or depreciation in value, by adding them to his tally. Please let me have your and others' views on this.

So while the PAC of 60% of the premium is designed to carry the ST, I cannot get the insurer to admit that. I'm quite certain that the agent is not paid more than 25% of the 1st premium (Rs 12, 500) as commission, which still leaves SLIC Rs17, 500 of my premium to play with. Other insurers, as far as I know, do not charge more than 40% of the first premium as PAC

To summarize, SLIC (or any other insurer / fund company for that matter) camouflages it's initial charges to include the ST payable on the initial charge, deducts allotted units claiming to pay for ST and adds them to it's tally. The problem is how do I prove that the provider is charging me twice for the same levy and benefitting out of it? Mr Vineet and other esteemed members of this forum, please throw me a line on this.

Best Regards

Suresh Kumar

Vineet (Director) 05 November 2009

Dear Mr Suresh,

You have very strong views on the issue with lot of presumptions. ULIPs by definition are very costly preposition and you should have made a thorough study before making investment.

by cancellation of units for service tax payment, nothing is added to kitty of fund house as by doing so the corpus of fund is reduced and equivalent amount of cash goes out for payment of service tax. Units are nothing but but reflection of net assets of the fund valued at particular day.

If you suspect that fund house has charged you double for the service tax, make a complaint to SEBI.