Leading corporates are in a hurry to renew their insurance cover to escape the 3 percentage point hike in service tax on insurance premiums announced in the Budget for 2003-04.

Over 40 per cent of total insurance premiums, exceeding Rs 11,000 crore (Rs 110 billion), comes from the corporate sector.

A large chunk of this is up for renewal on April 1. The hike in the service tax rate to 8 per cent, proposed in the Budget for 2003-04, is feeding the frenzy because insurance cover will become costlier.

A diversified group with major presence in steel will renew the group's insurance cover one day before the due date, April 1, in order to save over Rs 1 crore (Rs 10 million) in premium. Another company is looking at saving Rs 60 lakh (Rs 6 million) by renewing the cover on March 31.

"The hike in service tax is a big blow to us. We don't know whether the hike will be effective from the date of notification or from April 1. We want to play safe by renewing our cover a day earlier," said a senior executive with a private sector oil company.

This will not be the first instance of corporates altering the date of renewal of insurance cover. Whenever tariffs increase, both public and private sector entities bring forward the date of renewing their policies.

The New India Assurance Company lost a large account to the Oriental Insurance Company when service tax was first imposed on non-life insurance premiums.

The company wanted to renew its cover before the due date, but New India refused to oblige.

Insurance companies feel their clients are jumping the gun, as they do not expect the hike in service tax to be effective till after the Finance Bill is passed.

"It is not a sensible thing to do. We are telling clients that the change in service tax will come about only after the increase in service tax has been gazetted," said Sandeep Bakshi, CEO of ICICI Lombard General Insurance Company.

The issue has created turmoil in the industry. "The hike in service tax and increased premium is a disincentive for corporates to insure at present value or replacement cost," said a senior executive with another private insurance company.

Although the amount of GDP spent on insurance in India is among the lowest in the world, the contribution of the insurance levy to the exchequer is high when one considers the 40 per cent tax paid by insurers and the 8 per cent service tax on insurance premium.