 "Life insurers want service tax to be back at 1.5%")
According to the finance ministry, exchange of views between industry groups and government on tax related issues or tax related disputes would give an opportunity to Government to hear the arguments of the industry groups. Further, the ministry said that it will also give the government an opportunity to explain its stand on tax related matters.
Vivek Mathur, CFO, Tata AIA Life Insurance said that exclusive deduction should be introduced in Income Tax for life insurance premium under Section 80C. Presently the deduction of insurance premium is part of Section 80C but cumulatively with other categories.
Also Read
"Life insurance premium should be given an exclusive amount of deduction of Rs 1 lakh. These are long term funds that can then be invested by insurance companies in long term infrastructure projects through investment guidelines mandated by Insurance Regulatory and Development Authority (Irda)," he said.
As per current provisions, the carry forward of losses of insurance business is at 8 years. Mathur said that this should be allowed for 15 years. He added that in view of tough regulatory and business environment, most of the life insurance companies are still carrying accumulated losses despite being in business for more than 8 years.
"The threshold limit of Rs 5,000 for withholding tax u/s 194-D on payment of insurance commission should be increased to Rs 50,000 in view of the fact that an Individual agent is not required to pay tax upto taxable income of Rs 2 lakh. It will help the insurance companies to comply with the new stringent TDS rules as well as reduce the burden of tax department for issuing the refunds," Mathur opined.
Service tax is a crucial issue, wherein insurers are requesting a reversal of the new service tax of 3%.
Rajesh Relan, Managing Director and Country Head, PNB MetLife India said that currently there is a 3% service tax levied on the first year premiums for traditional life insurance policies.
"This makes the product unattractive for longer tenured customers. It is suggested that the service tax limit on Traditional Products in the First Year should be set back to the 1.5% levels as earlier. Further, service tax should be charged only on presumptive basis to fund management charges," he added.
The insurance companies are mandatorily expected to invest 50% of assets under management in government securities and 15% towards infrastructure funds. Relan said that the industry invested close to Rs 90,000 crores in 2010-11 in infrastructure which has seen a dip in the last 2 years.
Relan explained that the drop in tax realization will get more than compensated with the benefits of higher volumes that get driven and longer tenured funds available for infrastructure development.
The Direct Taxes Code (DTC) has proposed that for insurance products to come under the Exempt-Exempt-Exempt (EEE) bracket, the sum assured should be 20 times the annual premium.
"If this is implemented pure risk products would become unviable for the middle and older aged population as the premium rates for this age group would be higher. The limit on sum assured (SA) should depend on age where the older population should come under the 5 times regime otherwise premium to SA ratio is adverse for them," said Relan.
Since new changes are being brought in the tax regime, insurers have requested that the changes should not be implemented on existing policies. Relan added that imposition of tax on existing policies will result in mass surrender of such policies before effective date of change in tax laws which will destabilize the industry.
Making pension products attractive, from a taxation perspective is also a suggestion mooted by the life insurance industry. Vibha Padalkar, ED and CFO of HDFC Life said that the major issue was to extend the deductions under Section 80C of the Income Tax Act to either allow a higher limit than the present limit of Rs 1 lakh or to have a separate limit for long-term savings products.
Further, there should be a separate category carved out for pension products, like that for NPS.allows certain investments and expenditure to be deducted from total income up to the maximum of Rs 1 lakh.
Padalkar said that there is also a dichotomy in the way pension is taxed and savings products are taxed. While for savings products, the premium excluding fund value is taxed, for pensions the entire amount is taxed. Padalkar explained that it was the income and not the capital that was needed to be taxed.
From a corporate perspective, the issue of taxes imposed on negative reserves (all probable future profits) has also been suggested to be simplified. Padalkar said that there should be a consistency in the tax imposed on negative reserves and it should made simpler. She further said that there should also be directions given for tax refunds after decisions given in favour of it at the tribunal level. Tax on negative reserves does not reflect in the solvency margin of an insurance company.
At least Rs 7 trillion of life insurance funds are invested in government securities and around Rs 1.6 trillion in infrastructure alone. Relan said that during the financial turmoil of 2008-09, when foreign institutional investors withdrew Rs 47,000 crore from the equity markets, life insurance provided some stability to the market by net buying of equities amounting to Rs 51,000 crore.
"Moreover, apart from post offices, life insurance is a major sector aggregating the savings in the rural sector with mandatory 18% policies required to be sold in rural areas. The Shome panel needs to retrospect on this look at resolving the life insurance industry’s taxation issues at the earliest," he said.
This forum, headed by Shome, will meet every Wednesday. The first meeting of the forum will be held on August 7, 2013 and it will be held thereafter on every Wednesday.