Feb 25, 2013 06:48 PM IST | Source:

Budget 2013-14: Hope govt ups FDI cap for insurance to 49%: Royal Sundaram

With passing of Insurance Amendment Bill in Lok Sabha, the sector is hopeful to see the increase in the FDI limits from 26% to 49% in the Budget.

Ajay Bimbhet
Royal Sundaram Alliance Insurance Company Ltd

Royal Sundaram's wish list from the impending 2013 budget


Measures to increase insurance penetration:

It is a fact that the Non-Life Insurance penetration (Premium as a percentage of GDP) as well as per capita Insurance Premium is very low.  Non-Life Insurance segment has a very high potential to grow.  However, in the absence of incentives, individual prefer saving instruments, wherein they will get back the amount saved with interest or at least to the extent where there is a Tax savings incentive available.

Service Tax

a) Considering the abysmally low penetration of insurance in our country, there needs to be a concerted effort to make insurance all the more affordable and attractive for the common man. The Government should consider waiving off service tax on insurance premium paid, or at least exempt health insurance products, RSBY, Crop Insurances, Senior Citizens Policy and Long term insurance products such as property and other exempt categories from the purview of service tax.

b) To promote insurance penetration Government can consider giving SOPs to certain sectors like SME's for providing Health Insurance Cover to all employees.

Income Tax

d) The Government must consider incentivising people with increasing the limit of section 80C from the current limit of Rs. 1 lac to Rs. 2 lac at least.

e) Further, given the high cost of medical care and to encourage more people to purchase health insurance, the limits under section 80 D of Income Tax Act, 1961 should be raised to Rs. 50,000/- from the current level of Rs. 15, 000/- . {Currently, under this section, health Insurance Premium paid in accordance with a scheme framed by any insurer approved by the Insurance Regulatory & Development Authority (IRDA) can be deducted up to Rs.15,000 from taxable income. If the policy is taken on the health of a senior citizen, the limit gets enhanced to Rs. 20,000/-}.


Increase FDI limit

With the Finance Minister's discussions held on the issues concerning the regulatory environment in the financial sector, and passing of Insurance Amendment Bill in Lok Sabha, we are hopeful to see the increase in the FDI limits from 26% to 49%. Infusion of additional capital can fuel the growth of insurance companies, help them in further geographical expansion to more tier II and tier III cities, cater to the requirements of rural markets and help Insurers to augment solvency positions.

Reinsurance payments not to be liable for tax deduction at source

As of today, the income tax department seeks deduction of tax at source for all premium cessions to reinsurers.  General Insurers, as part of their overall risk management, cede a part of the premium received by them to the foreign reinsurers apart from the national reinsurer (GIC Re). These foreign reinsurers generally do not have any permanent establishment in India and hence do not attract the provisions of Section 9 of the Income Tax Act (Income deemed to accrue or arise in India).

Withholding of tax would discourage the Re-insurers and could also lead to a situation of the reinsurance prices hardening and impacting availability of reinsurance capacity. The budget should pave the way for Central Board of Direct Taxes to issue appropriate circulars clarifying that payments to Reinsurers would not be liable to tax deduction at source.

Exemption from IT for profit on sale of investments
In order to encourage general insurance players to be active participants in the capital markets, there is a requirement for specific exemption from income tax on profit on sale of investments. Alternatively, general insurance companies to be placed on par with other industries on applicability of capital gains tax provision.

Minimum Alternate Tax (MAT):

The General Insurance companies have also been brought under the ambit MAT. However, Section 115JB of the Income Tax ACt starts from the premise where corporate have prepared their financial statements in accordance with Schedule VI of the Companies ACt, 1956.  Insurance Companies compile their financials in accordance with the Regulations prescribed by the Regulator IRDA.  Hence, for insurance companies since Schedule VI is not applicable, it is only appropriate that they be kept outside the purview of MAT, like life insurance companies.

The issue of admissibility of UPR (unexpired premium reserves) as per IRDA regulations rather than as per Income Tax Act only, for IT deductions.

The UPR (unexpired premium reserves) is at present restricted to the extent of limits specified in rule 6E of the income tax rules due to which insurance companies need to pay income tax beyond their profit disclosed in their audited accounts. Hence, the UPR created as per IRDA regulations should be exempted from the purview of rule 6E. In other words, limits of reserve for unexpired risks should be permitted in line with the IRDA regulations.

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