Union Budget 2015: Increased tax sops to fuel savings growth: ICICI Pru Life

Sandeep BatraIt’s budget-time and this time, the expectations are very high. We believe this is one of the biggest opportunities for the government to walk the talk, of it being pro-reforms and pro-growth. Though the economic growth globally seems to have slowed, India has sustained its pace. It will be interesting to see how Mr. Jaitley, Honorable Finance Minister, carves out the details for a budget that will enable revival of investment, economic growth and job creation.A quick look at the current scenario indicates that the new government has taken a number of steps to revive growth and control inflation. A sharp drop in crude prices has reduced the country’s external vulnerability and has given more room to the government to reduce its energy subsidy bill. We believe that the government will be able to meet its fiscal deficit target of 4.1% of GDP for FY15 and keep a check on its expenditure growth.At a macro-level, pushing the Goods and Services tax (GST) through the budgetary session will be the top agenda. It is also likely that the government will push for the passage of bills related to the six ordinances promulgated recently, which include those on coal, mines and minerals, e-rickshaws, amendment to Citizenship Act, land acquisition and foreign direct investment in insurance. The infrastructure sector, which had slowed down sharply over the last few years, has been one of the focal points of the government’s agenda to lead economic recovery. The government has taken serious note of this and is expected to announce measures to aid the recovery of this sector. For instance, removal of Minimum Alternate Tax on infra assets will ease cash flow constraints and likewise abolishing or reducing the inverted duty structure in some capital goods sectors will most certainly help to push the theme of ‘Make in India’.There is a sentiment of optimism across the BFSI arena. Talking specifically about life insurance, the industry has been facing some headwinds due to the economic slowdown which in-turn has adversely impacted the household savings rate in financial assets. Savings in financial assets was 11.6% in FY2008 which came down to 7.2% in FY2014. In the last union budget, the Finance Minister had provided additional breathing space to tax-payers by raising the limits for investments u/s 80CCE. This was essentially done to stimulate the working population to increase their savings in financial instruments. While the increased confidence in the economy will encourage savings in financial instruments, increasing the savings limit u/s 80CCE to Rs. 2 lakhs could provide a big boost. In the interest of customers, we believe, the sector could do with a few reforms especially on the taxation front, which, if effected could provide the necessary impetus for increasing financial savings.The average life expectancy of individuals is on the rise due to sophisticated medical and healthcare facilities. This effectively translates into a longer life, after retirement. The core proposition of Annuity is to enable individuals to make a lump-sum investment to generate regular income for life. This comes handy when a person is investing the retirement corpus. From an investor’s point of view, the receipt of immediate annuity constitutes both principal and interest. As per the current tax laws, the entire amount of annuity is taxable whereas there is no case to tax the principal amount. Given the nature of the product and the need it satisfies, the taxation can be made at par with other long-term saving instruments such as Public Provident Fund, National Savings Certificate, etc.Another aspect that needs to be considered is that life insurance is primarily meant to provide financial protection to the dependents of the policyholder. The insurance regulator has stipulated that the Sum Assured (SA) needs to be 7 or 10 times the annual premium, depending on the age of the policyholder. But under taxation laws, referring to section 10(10D) – for the policy to qualify for tax benefit, the premium to capital sum assured ratio should be capped at 10%, else the proceeds of the policy will be taxed. Section 10(10D) provisions can be suitably revised in line with the minimum assured death benefit guidelines prescribed by the regulator to iron out the disparity between Insurance law and tax provisions. Furthermore, life insurance products which do not qualify for exemption and the income from which is not exempted from tax, can be treated as Capital Assets and the income earned by the policyholders subjected to Capital Gain Tax, in the same manner, as the sale of Equity Shares and Mutual Funds. The policyholders could thus enjoy the benefit of indexation, which would reduce the tax burden on them.Mr. Jaitely Sir, our humble submission to you is to frame new laws or fine tune the existing ones and ensure that the implementation leaves no room for double interpretation. The tax and interest demands raised due to lack of clarity puts a serious strain on the finances of organisations besides the cost of litigation and man hours spent in disputes. This is not specific to the life insurance sector but across industries.In the interest of larger penetration and with a view to encouraging people to buy life insurance as a long-term protection and savings tool, it would help if due consideration is given while subjecting the sector to service tax.As we head into a new financial year, customer benefits through long-term savings and tax friendly initiatives could result in an increased inflow into the financial savings of the country.The author is Executive Director at ICICI Prudential Life Insurance.