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Unshackle insurance industry, aim for long-term development

20 February, 2008

The general insurance sector size is estimated to be around Rs30,000 crore and is growing at a rate of 15% per year. The industry cannot grow to the levels that have been forecast without an infusion of additional capital. This is only possible if higher FDI is permitted. This will unshackle the insurance industry and drive growth and long-term development.

Key recommendations
 Increase FDI limit from current 26% to 49%:Hike FDI to 49% to enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration
 Government to go ahead with the Comprehensive Insurance Reforms Bill this year
 Waive service tax on micro insurance products: the current service tax, which is 12.36% (up from 12.24% in 2007) including education cess, is steep and detrimental to the much-desired growth of rural insurance
 Exemption on rural health premium should be made applicable to private insurance players. At present, under the government's Universal Health Insurance Scheme, this exemption is available only to PSU companies
 Rural insurance is a huge market waiting to be tapped and waiving the service tax will make micro insurance products more affordable for the rural populace, and will drive pan-India penetration of this market
 Raise the ceiling under the 80D exemption: under Section 80D, medical insurance (up to Rs15,000) is eligible for deduction. A higher limit of Rs20,000 is permitted for senior citizens. This limit is low in view of the substantial increase in the healthcare costs in the last few years
This ceiling needs to be doubled from the current level factoring rising healthcare costs. This would enable the insured to procure policies with a higher sum insured and thereby meet medical costs. Besides this, the 80D exemption should also be made applicable for personal accident and home insurances
 Exempt small transactions from Service Tax: The present notification exempts small transactions involving premium of less than Rs50 (except motor insurance) from the ambit of service tax. The threshold limit of Rs50 was fixed in 1994 and needs revision. Therefore, small transactions involving premium up to Rs1000 should be exempt from service tax. This will be in the interest of the lower strata of society.
 All individual health insurance policies should be totally exempt from service tax
 Insurance premium for covering small and medium enterprise risks should be exempt from Service Tax
 For other insurance products, we would like a reduction in the service tax by at least 3-4%
 Not to make reinsurance payments liable for tax deduction at source: As of today, the income tax department requires that there be a tax deduction at source for all reinsurance transactions. General Insurers, as part of their overall risk management, cede a part of the premium received to reinsurers including 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).
 Reinsurance is a globally driven market and withholding of tax is not a normal practice anywhere in the world. The UN Model Convention on taxation specifically exempts reinsurance from deeming accrual of income, notwithstanding the fact that the premium or risk may pertain to the territory of any particular country. India has, in some of its treaties with other countries, followed the UN Model Convention, which is an indication of intent with respect to taxation of such payments.
 Withholding of tax would discourage reinsurers and lead to a situation where pricing of reinsurance premia could get adversely impacted.
 It is recommended that the Central Board of Direct Taxes to issue appropriate circulars clarifying that such payment would not be liable to tax deduction at source.
Ajay Bimbhet is managing director, Royal Sundaram Alliance Insurance Co. Ltd