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Rediff.com  » Business » 'Govt should waive off the service tax on premiums'

'Govt should waive off the service tax on premiums'

March 14, 2012 18:12 IST

Money1. Increase FDI limit from the current 26% to 49%.

Commensurate with the growth in business of insurance companies, the capital requirements have been increasing.

Given the pressing need for more equity participation from foreign partners of the insurance companies, there is a need to increase the FDI limit from 26% to 49%.

Infusion of additional capital can fuel the growth of these companies, help them in further geographical expansion to more tier II and tier III cities and also cater to the requirements of rural markets.

2. Waive Service Tax

Considering the abysmally low penetration of insurance in our country, there needs to be a concerted effort to make insurance all the more affordable and an attractive proposition for the common man.

Clearly, abolition of the service tax will enable this process.

Currently the service tax stands at 10.3% including education cess and the government should consider waiving off the service tax on premiums paid.

Alternatively, they should at least exempt health insurance products from the purview of service tax.

This move will help to develop health insurance in the country by aiding greater penetration.

3. Reinsurance payments not to be liable for tax deduction at source

As of today, the income tax department seeks deduction of tax deduction at source for all premium cessions to reinsurers.

General Insurers, as part of their overall risk management, cede a part of the premium received by them to the foreign reinsurers apart from the national reinsurer.

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).

Withholding of tax would discourage the Re-insurers and could also lead to a situation of the reinsurance prices hardening and impacting availability of reinsurance capacity.

The budget should pave the way for Central Board of Direct Taxes to issue appropriate circulars clarifying that payments to Reinsurers would not be liable to tax deduction at source.

4. Exemption from IT for profit on sale of investments

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.

Alternatively, general insurance companies to be placed on par with other industries on applicability of capital gains tax provision.

5. The issue of admissibility of UPR (unexpired premium reserves) as per IRDA regulations rather than as per Income Tax Act only, for IT deductions.

The UPR (unexpired premium reserves) 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 exempted from the purview of rule 6E. In other words, limits of reserve for unexpired risks should be permitted in line with the IRDA regulations.

6. Deduction in respect of medical insurance premia

Section 80 D limits to be increased substantially from the current levels, given the high cost of medical care and to encourage more people to purchase health insurance. 7. CENVAT Credit

Insurance companies should be permitted to avail CENVAT Credit in respect of service tax paid on services rendered by Motor vehicle repairers.

The writer is the managing director, Royal Sundaram Alliance Insurance Company

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