The finance minister has changed the equations in the insurance business even before the new private players reached first base
Players in the life insurance industry, both public and private, must be in a state of bewilderment. Yashwant Sinha, while presenting Budget 2002, has hit them harder than anyone expected.
It took an eternity for the sector to be opened to private players. It was a move that was universally applauded as it meant that the monopoly of the Life Insurance Corporation (LIC) had finally been broken.
It is not an easy task for a newcomer to take on an established giant like the LIC, unless it has developed strategic alternatives and a team of competent, business-savvy professionals. This is exactly what the private insurers, such as ICICI Prudential, Birla Sun Life, HDFC Standard Life and others, had set out to do. And then Budget 2002 happened.
Let us see how this Budget has hit the insurance industry and, consequently, the middle-class.
Section 88: Dilution of tax rebate
Apart from the life cover, one of the biggest-selling propositions of an insurance product is the attendant tax-break in the form of the Section 88 rebate. Budget 2002 has all but summarily taken it away.
At present, a deduction of 20 per cent from income tax payable is available to individuals and HUFs, on contribution to life insurance premia, provident fund, etc.
In the case of an author, playwright, artist, musician or sportsperson, the deduction is higher at 25 per cent. For tax payers with a gross salary income not exceeding Rs 1 lakh (before standard deduction) and in whose case, gross salary income is not less than 90 per cent of the gross total income from all other sources, the deduction is 30 per cent.
It is proposed that for people with a gross total income (before deduction under Chapter-VIA) above Rs 1.5 lakh but not more than Rs 5 lakh, the rate of rebate shall be reduced to 10 per cent. The rebate shall not be available for people with a gross total income (before deduction under Chapter-VIA) of more than Rs 5 lakh.
It is also proposed to provide that the deduction shall be available on so much of the aggregate of sums as do not exceed the total income chargeable to tax during the previous year. It is also proposed to withdraw the special rate of 25 per cent for sportspersons, artists, etc. However, the existing limit of qualifying investment at Rs 80,000 will continue.
This is by far the most penal feature of this Budget. Apparently, the authorities justify this measure as a means of taxing the rich more than the poor. However, that is already been done by virtue of having different tax slabs for various income levels. Those who earn more pay higher tax. Taking away the only meaningful tax-saving mechanism available is a travesty of justice.
Imposition of service tax
As if this was not enough, a 5 per cent service tax has been proposed for life insurance policies.
If the Section 88 provision renders insurance policies less attractive from the taxation angle, the service tax makes the premium-return equation of life insurance policies go askew, diluting their allure as investment products.
This move will adversely affect the yields of new policies because the premiums will now become costlier. What about existing policy holders?
It is not clear, but in my opinion, once the premium has been contracted for, it cannot be changed. The insurer will have to bear the burden hurting his bottom line.
In any case, don
