Duty cut: Benefit for FIIs, insurance, banking customers

Foreign institutional investors (FIIs) will be one of the biggest gainers in the financial sector from the reduction in service tax. At the retail level, insurance buyers and bank customers will see a sharp reduction in costs because of the service tax cut.

���FIIs will see their brokerage costs come down because of the lower service tax. Unlike corporates registered here, FIIs do not have any output service tax liability in India against which service tax payments can be offset. So, the two-percentage-point reduction will result in an equivalent cost saving,��� PricewaterhouseCoopers��� Prasad Paranjpe said.

He added that other entities will also gain as they will save on working capital. With the reduction in taxes, the amount they have to remit and claim for offset will be lower. After telecom, where the impact will be the highest across industries, the benefit will be for insurance buyers.

Retail insurers will see their motor car insurance premium and mediclaim premium come down by 2%. In life insurance, the savings will be marginal since service tax is not applied on the component of the premium that goes toward savings. Banking charges, including those on credit cards, loan processing charges and forex charges will come down. In short, any fee charged by a bank will come down.

Banks have been lobbying for service tax exemption on the income they earn from agency commission from the government. Banks receive commission for collecting and remitting taxes and distributing government pension. In most transactions where the service tax is imposed, the tax is imposed on the service provider and is passed on to the user.

In the case of service tax on government commission, the service tax amounted to a reduction in the commission as the service tax was borne by the banks. Banks have been seeking an increase in commission from the government.