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Increase FDI limit from 26% to 49% - Money control.com

03 July, 2009


A HIGHER foreign direct investment (FDI) will unshackle the insurance industry and drive growth and long-term development, enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration. Over Rs 10,000 crore of foreign capital could flow into the country if the government were to pass the Insurance Amendment Bill that raises the FDI  limit.

Waive service tax on micro insurance products
The growth of the rural insurance industry necessitates a waiver of the service tax, which currently stands at 10.3 per cent including education cess. This tax is detrimental to the growth of the rural insurance industry and insensitive to the plight of rural populace which lacks quality healthcare and is vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses, and disasters of both the natural and man-made varieties.  Rural insurance has an enormous potential for growth, and a service tax waiver will make micro insurance products more affordable for the rural populace, and will drive pan-India penetration of this market. The government's universal health insurance scheme exempts public sector undertaking (PSU) companies from the service tax which precludes a level playing field for all insurers. An exemption on rural health premium should also be made applicable to private insurance players.
Small transactions to be exempted from service taxes
There is an urgent need to increase the threshold for the levy of service tax on policies. The present notification exempts small transactions involving premium of less than Rs 50 (except motor insurance) from the ambit of service tax. The threshold limit of Rs 50 which was fixed in 1994 needs urgent revision. Small transactions involving premium up to Rs 1000 should be exempt from service tax which will unquestionably benefit the under-privileged sections of our society. 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 to 4%. Administrative convenience in policy processing will be facilitated. Considering the low penetration of insurance in our country, there needs to be a concerted effort to make insurance all the more affordable and hence an attractive proposition for the common man. Clearly, abolition of the service tax will enable this process.
Reinsurance payments not to be liable for TDS
As of today, the income tax department requires that there be a tax deduction at source (TDS) 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 the reinsurers and could also lead to a situation where the pricing of reinsurance premia could get adversely impacted. Therefore we would like the Central Board of Direct Taxes to issue appropriate circulars clarifying that such payment would not be liable to TDS.

Exempting personal insurance from service tax
There is an overwhelming demand across all players in the industry that individual health insurance policies should be totally exempt from service tax. Exemption of health insurance from the service tax will make health cover affordable and accessible for the layman.  Consequently, cheaper health insurance will increase its pan India penetration. Additional IT exemption for householders  policies and concessional IT rates will give a fillip to home insurance and will also reduce the burden on the government in the event of catastrophes (CAT events).
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. The issue of admissibility of unexpired premium reserves (UPR) as per Insurance Regulatory and Development Authority (IRDA) regulations rather than as per Insurance Act only, for IT deductions. The UPR 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 allowed as per rule 6E.

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