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February 28, 2001                                       Feedback  

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Grey areas in taxation of insurance firms continue

BS Banking Bureau

The Union Budget 2001-02 has extended tax incentives enjoyed by the Life Insurance Corporation of India (LIC) by way of deductions and rebate to private life insurance players as well.

However, many of the recommendations made by the V U Eradi (Tax) Committee have failed to be incorporated, leaving a number of grey areas that prove to be a cause for concern for the new players.

Private insurers would now enjoy the benefits under Section 80cc of the I-T Act, which covers contributions to pension funds, where deduction from gross income is allowed for any annuity plan up to a maximum ceiling of Rs 10,000.

However, private life insurers had in their recommendations to the finance ministry asked for this ceiling to be increased to Rs 2 lakh in order to capitalise on the huge funds that would be made available in the months of April-May 2001, as more than one lakh bank employees opted for voluntary retirement scheme (VRS).

Clarification is being sought by the private sector as to whether returns on pension products are tax free as is the case for LIC under Section 10 of the I-T Act. With a differential taxation policy, LIC would be able to offer comparatively better returns, as there would be no tax outflow, said a senior official from HDFC Standard Life.

IDBI-Principal Asset Management Company's managing director and CEO, Sanjay Sachdev, welcomed the first step towards pension reforms, with the proposal that government employees joining after October 1, 2001, would be covered under a defined contribution pension plan.

Meanwhile, as new companies cannot hope to make any profits for six to 10 years, their ability to carry forward deficit remains a grey area, said Birla group director, S K Mitra.

Mitra highlighted the grey area with relation to 12.5 per cent tax on surplus funds earmarked for shareholders. While policyholders would be taxed at 12.5 per cent as is the case with LIC at present, clarification is being sought as to what would the taxation on shareholder profit, said Mitra. "Whether this would be at 12.5 per cent or at the corporate tax level of 38.5 per cent", he queried.

Senior officials at Allianz pointed out that the finance minister might not have wanted to do much tinkering with the tax rate of 12.5 per cent on life surplus fund, as any downward revision would have negatively impacted the banking sector.

"Life policies would have become more attractive in the hands of the policyholders had that been done. Bank fixed deposits would have had to face greater competition from life insurance policies in addition to mutual fund schemes," he added.

Further, reduction in corporate tax is expected to boost the bottomlines of state-owned general insurance companies, which have been making underwriting losses. Said a senior official from New India Assurance Company, the bottomline ought to be up 7 to 8 per cent due to the abolition of surcharge.

Applauding the budget proposal for the insurance sector, George Oommen, Tata AIG Life Insurance Company's managing director, said: "Steps taken by the finance minister are in the right direction, and send positive signals to the private insurance companies."

Tata AIG General Insurance Company's managing director said the finance ministry has responded well in supporting the IRDA's policies. "This will go a long way in creating a level playing field," he said.

Source: Business Standard

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