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Is the Service Tax on Car Insurance Optional?

Meeta Sabnis Meeta Sabnis 15 February 2016

Be it a restaurant bill that you are settling (where there is an additional service charge) or getting your computer serviced, every bill has a component called the Service Tax. What is it? And is it applicable to your motor insurance premium as well?

Service Tax on Car Insurance

Service Tax is defined as a tax levied by the Central Government of India on services provided or to be provided excluding services covered under negative list and considering the Place of Provision of Services Rules, 2012 and collected as per Point of Taxation Rules, 2011 from the person liable to pay service tax.

What is Service Tax on Car Insurance?

In India, Service Tax is an important form of indirect tax. The Central Board of Excise and Customs or CBEC is responsible for collecting the imposition in all the different states of India, with an exception of the state of Jammu and Kashmir where it is not levied. It is the end user who shoulders the burden of the service tax. The purpose served by levying this service tax is to lessen the extent of the taxation imposed on business and industry.

Explore its Ambit

Service Tax was first introduced in India in 1994-1995, when there were only three services under its ambit. Today that narrow list has grown manifold to include over a hundred categories including educational institutes; consultants, brokers and analysts; various agencies, service providers and firms, etc.

Service Tax and it Exemptions

Our nation taxes services based on a negative list, that is any service not especially excluded from this levy is taxed. So, there are a few exemptions to the collection of Service Tax, other than within the state of Jammu and Kashmir. Here they are:

  • Small-scale service providers with an annual turnover below Rs. 4 lakh are exempted from payment.

  • Services offered to United Nations and Global Agencies and provisions to Special Economic Zones (SEZ) are exempted from payment.

  • Export of services is exempted from payment.

  • Cost of commodities and substances rendered at the time of offering services are exempted from payment. This kind of exemption is allowed provided CENVAT credit on those commodities and substances is not collected.

How much is the Service Tax?

In June 2015, the government announced a hike to 14.00% from 12.36% in Service Tax rate applicable to all insurance premiums. This action resulted in making the cost of insurance dearer, with the revised rate.

In the first week of November, the Ministry of Finance issued another circular announcing the decision to decree a Swachh Bharat cess (at the rate of 0.5%) on all services presently liable to be charged Service Tax. So effective, November 15, for each Rs.100 worth of taxable services you pay, 50 paise is decreed as Swachh Bharat cess.

According to the finance ministry, the proceeds from this cess will be exclusively channeled towards all Swachh Bharat initiatives. In a statement, the ministry stated that, “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making a contribution to Swachh Bharat.”

With this addition of 0.5%, the total Service Tax will go up to 14.50%. So for every Rs. `100 paid for a service, you are paying a Service Tax of Rs. 14.50, making all services chargeable under this tax regime that much more expensive.

What It Means For You?

With this add-on cess you are paying more for all tickets, bills, services, etc. This includes financial services as well, such as all banking service fees for financial planning products such as savings account, fund transfer and credit card, as these come with service tax attached. Processing, prepayment and late payment fees for various types of loans attract Service Tax, as do banking products, financial instruments like equity and insurance.

Do you have to pay Service Tax on Your Auto Insurance Premium?

This new costly proposition makes it very easy for many people to avoid purchasing this critical component of financial planning called insurance, including the mandatory comprehensive motor insurance plans.

This is a very scary proposition. The entire body of your financial planning rests on the able foundation of adequate and relevant insurance planning as it works to secure you and your loved ones against unforeseen incidents, distress and expenses by protecting your financial future.

Though it is true that the increase in the Service Tax rate will drive up all insurance premiums, the impact will be less than is feared. If your annual premium burden was Rs. 6,000 for insuring your regular car, the new premium of the standard motor insurance would not be more than be Rs. 6,088 which is a marginal hike.

Why Insurance is a Must–Under All Circumstances?

Insuring your car is not a choice in the country; it is binding by the law of the land. It is after all your motor insurance cover that is the main safety net that prevents all unforeseen incidents to your vehicle and the other parties involved from bearing a huge financial hole in your pocket.

If you have decided to purchase a car, don't skip buying the necessary insurance plan. And if the plan is up for renewal, pay the premium without fail, Service Tax or no Service Tax.


Meeta Sabnis
Written by Meeta Sabnis
Her mantra in life is to dream, and dream until you turn them into reality. A neurotic Kajol fan, Meeta loves spending time with her gorgeous twins, ensuring a childhood they’ll be proud of. Bargain hunting, crazy dancing and romancing alphabets are some of her other cravings. She’s currently a Content Writer at Coverfox.