Tax: Separate sub-limit for long-term savings like insurance: The most crucial recommendation which has been raised over the years is to increase tax benefits around long-term savings to spur demand for life insurance products. This will help provide a fillip to insurance sales, increase the level of insurance penetration in the country and also help channelize savings into financial instruments & long term infrastructure projects as against non-productive investments like gold.
Currently the deduction under Section 80C is a combined limit shared with other investment products including provident fund contributions, savings certificates, bank tax saver deposits, child education and life insurance premiums, etc. The urban middle class, which is an important target group for life insurance, has no incentive to invest to secure their family’s financial future as he is already over invested under Section 80C.
Hence, the Government should look at encouraging people to save for long-term by providing a separate sub-limit for long-term savings like insurance. In addition, the Government should also look at a separate limit for premiums for pension products as it was in the past. Lastly given the low health insurance penetration in the country, the Government should also consider a separate limit for health insurance under Section 80(D).
· Service Tax: Rules relating to Point of Taxation (PoT) need to be simplified: The Point of Taxation (PoT) Rules requires insurance companies to pay advance tax on the first premium as well any renewal premiums paid in advance. Incase the policy gets cancelled, the insurance company is liable to refund the customers immediately, however it takes over a month for the insurance companies to get a refund from the Government. This is quite inconvenient as companies end up losing interest on this amount.
In order to simplify the tax administration, it is recommended that service tax liability should be made applicable:
· upon the ‘recognition of premium’ in case of new business
· ‘actual collection of cash’ in case of renewal premiums for traditional products
· FDI: Increase in foreign direct investment (FDI) in the insurance sector has been a topic of discussion for a long time and we hope that the new Government does take it up. Currently the total capital deployed in the insurance sector is close to Rs 34,000 crores. The FDI in this (assuming 26%) is close to 8700 crores. If 49% happens, the sector stands to gain additional 7,800 crores as FDI. The industry at this stage does need long-term capital for growth and expansion which only FDI can bring in. We need to encourage FDI at policy level as this is something that was laid out as an expectation in 2000 when the sector opened. FDI not only brings in capital and foreign exchange immediately into the economy but also enables companies to invest further in managerial ability, technical knowledge, administrative organisation, and innovations in products and production techniques.
The FDI cap of 26% in India is one of the lowest in the world. In China, it is 50%; Japan, South Korea, Vietnam, Hong Kong and Taiwan allow 100%; Indonesia has a limit of 80% and Malaysia 51%. The government of India announced its intent to raise the FDI limit in insurance over a decade back.
The author is Tarun Chugh, MD & CEO, PNB MetLife India.
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