With strong fundamentals the Indian economy has tremendous potential to grow at 7-8% a year. However it is at a phase where it is critical for the Finance Minister to strike a right balance between growth and inflation while improving consumption at the same time.Indian economy - Health
i) Fiscal deficit is a big concern for Indian economy currently. The government should try and control the fiscal deficit through reduced government expenditure and creating increased earning opportunities.
ii) Inflation is currently under control due to reduction in food inflation but petroleum prices and prices of other commodities may have an impact on inflation. Balancing inflation and growth is a big challenge before the government. Keeping this in view, inflation which has significantly dented disposable income in the hands of individuals, Finance Minister should provide relief in income tax burden to individuals especially in lower tax bracket so that household savings rate could be maintained.
iii) There is also a need for better physical infrastructure, higher quality education and higher skill quality labour. Therefore, the Government should continue its focus on assured employment programs, infrastructure programs related to roads and easy access to loans for companies to support the expected GDP growth rate.
Suggestions on core issues both in the proposed union budget and other proposed tax regimes are as mentioned below:
Budget Changes
Direct Tax
A) Personal Income-Tax
i) Promote long term savings habit by providing separate tax exemption limit of Rs. 2 lakhs for long-term saving instruments like Life Insurance.
ii) Increase slabs for personal taxation in line with proposed limits in DTC i.e. income exempt upto 5 lakhs thus generating more disposable income in the hands of people.
Education cess should be abolished completely to generate more disposable income in the hands of people
B) Corporate Tax
Indian life insurance market is facing numerous challenges for growth & is among the least profitable across Asia. The budget should address issues that will help make this industry attractive for both policyholder and shareholders
i) Abolition of Education Cess: Cess should be abolished completely to generate more disposable income in the hands of corporate. This will also help in making the tax structure more simplified.
C) Other Suggestions
i) Increase of FDI ceiling in Insurance Industry to 49 %. Increased FDI ceiling can bring in the much-needed capital for the growth of the sector and long-term development. This will also enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration.
ii) Investments in saving instruments including risk cover, pension products, etc are eligible for aggregate deduction of Rs 1 Lakh. We recommend a separate limit for tax exemption for long-term saving instruments like life insurance or increasing the limits on life and health insurance premium could be looked at.
Indirect Tax
i) Cenvat credit reversal of 20% introduced by Budget 2011 should be recalled. The life insurance industry in India is still at a nascent stage and almost all companies in the sector are having huge accumulated losses. At present, all revenues earned by a life insurance company are fully taxable. A blanket restriction on the cenvat credit for tax paid on inputs and input services are against the principles of a fair and neutral tax.
ii) Presently Service Tax on FMC on Management of Investment under ULIP is charged on rates of 1.35% or actual charges whichever is higher. Life insurance companies are charging FMC at rate lower than IRDA prescribed maximum of 135 bps. This is resulting into excess Service Tax. Recommended that ST should be charged on actual FMC amount.
New Proposed Tax Regimes
A) Direct Tax Code (DTC)
iii) Tax Rate: The DTC does not provide any specific rate of taxation for a Life Insurance Company. Accordingly, the same will be taxed at the general rate of 30% for a company. Large part of funds of Life Insurance companies are invested in infrastructure projects of the country. Also companies incur huge losses initially due to long gestation period of the sector. This will dissuade the promoters to invest in Insurance companies considering high risk & low returns. We recommend charging concessional rate of tax on profits @ 12.5%.
iv) Grandfathering of old policies: Clarification is required that all policies issued prior to DTC will enjoy the benefits prevalent at the time of issuing of the policy. DTC provisions will apply on policies sourced post implementation of DTC.
v) Exemption Limit: Proposed DTC provides deduction of Rs 50,000 for life cover, health cover and tuition fees. Life insurance products may see a downside as amount of Rs 50,000 may be exhausted for paying tuition fee alone for kids. We suggest that limit should be increased and should be wholly and exclusively for life insurance products to a minimum of Rs.2 Lacs.
vi) MAT: DTC has proposed MAT applicability on book profit basis prepared as per Schedule VI of Companies Act. MAT should not be applied on Life Insurance companies seeing long gestation period.
vii) Distribution Tax: DTC proposes that Life Insurance companies shall pay distribution tax @ 5% on amount of income distributed or paid to policyholders' of an approved equity oriented life insurance scheme. Presently there is no provision of Distribution Tax in current tax regime. Distribution tax should not be levied and the amounts payable to policyholders should be tax free else tax burden on policyholders will increase. Without prejudice to above, appreciation in value of EOLIS should not attract IDT.
viii) Tax exemption of maturity proceeds: All maturity proceeds/ benefits are tax exempt subject to the condition of sum assured being at least 20 times. Significantly stricter condition of 20 times for tax exemption has a negative impact on the size & growth of the industry & the limit should be reduced to 10 times. A multiple of 10 would provide a glide path to the desired objective of emphasizing protection in insurance.
ix) Third E-Maturity: Presently there is no provision of taxability of proceeds on maturity of insurance policy. DTC proposes that the amount received is not taxable if received on death or if maturity proceeds are received under a policy where premiums paid do not exceed 5% of capital sum assured. We recommend that money back products should not be taxable as they are payable on:- "contingency of life defined and as prescribed under the Insurance Policy".
"The amount is generally linked with sum assured and is certain at the Policy issuance stage".
This shows that the payment is linked with a stage of human life as covered under definition of "Life Insurance" as defined under section 2 (11) of Insurance Act 1938. Hence Money backs should be treated as kind of Sum assured payable on the happening of certain event of life.
B) Direct Tax Code (DTC)
i) Tax Rate: The DTC does not provide any specific rate of taxation for a Life Insurance Company. Accordingly, the same will be taxed at the general rate of 30% for a company. Large part of funds of Life Insurance companies are invested in infrastructure projects of the country. Also companies incur huge losses initially due to long gestation period of the sector. This will dissuade the promoters to invest in Insurance companies considering high risk & low returns. We recommend charging concessional rate of tax on profits @ 12.5%.
ii) Grandfathering of old policies: Clarification is required that all policies issued prior to DTC will enjoy the benefits prevalent at the time of issuing of the policy. DTC provisions will apply on policies sourced post implementation of DTC.
iii) Exemption Limit: Proposed DTC provides deduction of Rs 50,000 for life cover, health cover and tuition fees. Life insurance products may see a downside as amount of Rs 50,000 may be exhausted for paying tuition fee alone for kids. We suggest that limit should be increased and should be wholly and exclusively for life insurance products to a minimum of Rs.2 Lacs.
iv) MAT: DTC has proposed MAT applicability on book profit basis prepared as per Schedule VI of Companies Act. MAT should not be applied on Life Insurance companies seeing long gestation period.
v) Distribution Tax: DTC proposes that Life Insurance companies shall pay distribution tax @ 5% on amount of income distributed or paid to policyholders' of an approved equity oriented life insurance scheme. Presently there is no provision of Distribution Tax in current tax regime. Distribution tax should not be levied and the amounts payable to policyholders should be tax free else tax burden on policyholders will increase. Without prejudice to above, appreciation in value of EOLIS should not attract IDT.
v) Tax exemption of maturity proceeds: All maturity proceeds/ benefits are tax exempt subject to the condition of sum assured being at least 20 times. Significantly stricter condition of 20 times for tax exemption has a negative impact on the size & growth of the industry & the limit should be reduced to 10 times. A multiple of 10 would provide a glide path to the desired objective of emphasizing protection in insurance.
vi) Third E-Maturity: Presently there is no provision of taxability of proceeds on maturity of insurance policy. DTC proposes that the amount received is not taxable if received on death or if maturity proceeds are received under a policy where premiums paid do not exceed 5% of capital sum assured. We recommend that moneyback products should not be taxable as they are payable on:-
a) "contingency of life defined and as prescribed under the Insurance Policy"
b) "the amount is generally linked with sum assured and is certain at the Policy issuance stage"
This shows that the payment is linked with a stage of human life as covered under definition of "Life Insurance" as defined under section 2 (11) of Insurance Act 1938. Hence Money backs should be treated as kind of Sum assured payable on the happening of certain event of life.
The writer is CEO and MD, Max New York Life Insurance
