Financial services got more expensive

Last Updated: Mon, Jul 02, 2012 19:31 hrs

If an average inflation rate of seven per cent, since the beginning of the year, wasn’t enough, the government has made operating several financial products, among other services, more expensive.

In the Union Budget 2012-13, the scope of services that are taxed was widened and the tax raised to 12.36 per cent from 10.3 per cent. These taxes, which have come into effect from July 1, are likely to make transfer of cash, buying and selling of mutual funds and insurance and buying currencies costlier. While it was proposed to impute a service tax on inward remittances, the government clarified on Monday this will not be imposed.

The life insurance industry, which is already reeling under lower premium collections and stringent guidelines of the regulator, the Insurance Regulatory and Development Authority, on unit-linked insurance plans, will have to explain new charges to the customers. The service tax on the premium for policies where the mortality charges are definite has also been raised on the charges.

The government has made several financial products costlier
Item * Old service
tax (10.3 %)
New service
Tax (12.36 %)
Annual insurance  premium of Rs20,000  2,060 2,472
Buying and selling of foreign currency (as % of  brokerage, if brokerage is Rs100)  10.36 12.63
Exit load of mutual fund, if it Rs100

Not applicable

*Amounts are assumed; All figures in Rs                                       Source: Industry

For other policies, the service tax on the gross premium for the first year has been raised by 100 per cent, from 1.5 per cent to three per cent. While subsequent premiums will be taxed at 1.5 per cent. For the individuals, conducting diagnostic tests and visits to the dentist will be more expensive.

However, some reprieve comes from the Rs 5,000 exemption being offered in case of preventive health check-ups.

This was included as one of the exemptions with health insurance under Section 80D in the Budget, eligible for tax deduction.

Foreign currency
Customers, who are buying currencies to travel or sending it to children studying abroad, will find it more expensive. But here the tax will be on the commission that currency traders charge — 0.01-0.02 per cent. So, the burden is likely to be much lower.

Mutual funds
Service tax has been introduced on exit load of mutual funds. A number of fund houses charge between one and 1.5 per cent as exit load if the investor sells the units before a certain period of time. The service tax of 12.36 per cent will be added to the load now.

These loads are mostly charged by fund houses to discourage investors from exiting the scheme within before six months (especially, for debt funds) or one year.

The investor, therefore, has to take into account the capital gains he/she is making, should be more to offset the impact of capital gains tax plus exit load plus service tax for debt schemes. In addition, for equities there will be another 0.125 per cent that will be charged as securities transaction tax.

More from Sify: