The first-ever paperless fiscal Budget will be presented by Finance Minister Nirmala Sitharaman on 1 February 2021. The expected announcements bear the heavyweight of people’s expectations stemming from the economic downturn caused by the ongoing COVID-19 pandemic. While India has fared relatively well through the pandemic considering its population and healthcare infrastructure prevalent prior to the pandemic, the biggest challenge lies in nursing the economy which was anyway showing signs of slowdown even prior to the pandemic.
In 2020, the government announced multiple stimulus packages to aid ailing businesses and the workforce. However, the ongoing pandemic has emphasised the importance of insurance (health and life) as a form of financial protection for oneself and family, reiterating the unpredictability of life-altering events. While there has been an increased awareness of insurance offerings among consumers, especially term and health insurance, significant headway has to be made in terms of public awareness and public acceptance of insurance continues to be a push product in India. Considering the importance of insurance to the infrastructure sector and overall economy, the sector is hopeful that the finance minister will take the following measures in the upcoming Budget to help increase insurance penetration:
Increase in FDI limits
The finance minister in her maiden Budget speech in 2019 had highlighted the government’s intent to enhance the Foreign Direct Investments (FDI) limit in insurance companies. However, thereafter, there has been no further announcement on this matter. The liberalisation of FDI in insurance companies should be given a top priority and should be implemented in this year’s Budget. Given the current uncertainty and economic slowdown, the government should increase the FDI limit in the insurance sector to 74 percent without insisting on the requirement of it being ‘Indian controlled’ as this will help the sector in bringing better technical know-how, innovation and improving insurance penetration, thereby augmenting the efforts of the government to revive the economy.
Separate tax deduction for payment of life insurance premium
In Union Budget 2020, the finance minister announced a new optional tax regime for individual taxpayers wherein lower tax rates were introduced, and the taxpayers are required to forgo the claim of deduction under section 80C of the Income-tax Act, 1961 (the Act). Currently, under section 80C of the Act, among other deductions such as payments made towards employee’s provident fund etc, the taxpayer can claim a deduction of life insurance premium within the overall limit Rs 1,50,000.
It is a well-recognised fact that many individual taxpayers in India buy life insurance products to claim deduction under the Act. Moreover, the COVID-19 pandemic has reinforced the need for sufficient health as well as life insurance cover given life uncertainty. Hence, a separate deduction of the health insurance premium paid under section 80D of the Act should be allowed to taxpayers even under the new optional tax regime. Moreover, considering the higher cost of health insurance premiums, the government should revisit the limits currently available for claiming deduction of health insurance premium under section 80D of the Act and revise the same according to market conditions.
Reduction in tax on profits, gains
As per section 115B of the Act, the profits and gains from life insurance business are chargeable to tax at the rate of 12.5 percent. The tax rate of 12.5 percent was introduced in 1976 when the corporate tax rates ranged from 45 percent to 65 percent. In 2019, the government of India reduced the headline corporate tax rate to 22 percent (excluding surcharge and cess) for domestic companies and 15 percent (excluding surcharge and cess) for new manufacturing companies, subject to certain conditions. It is time that the government revisits corporate tax rates for life insurance companies and reduces the same since it could have a positive impact on cash flows and profitability of life insurance companies.
Extended carry forward for business losses
It is a well-recognised fact that life insurance companies have a longer gestation period vis-à-vis many other firms and still many of them continue to make losses even after 10 years of existence. Moreover, COVID-19 pandemic has further aggravated the financial position of life insurance companies. Given this, it is the right time for the government to allow an extended period of 12 years for the carryforward of losses incurred by life insurance companies.
Reforms for non-life insurance business
Last year, non-life insurance companies welcomed the amendment regarding allowability of deduction for unpaid statutory liabilities under section 43B of the Act in the year of payment. However, non-life insurance companies were also expecting a similar amendment regarding allowability of expenses in the year of compliance with withholding tax provisions, excluding reversal of provision in the year of credit to profit and loss account which was earlier disallowed. Non-life insurance companies have hopes that Budget 2021 would provide for such an amendment and bring clarity in their taxation mechanism.
The Indian branch of foreign reinsurers was hopeful that a
- Special code of taxation, that is fair and unambiguous would be introduced for them,
- Process of obtaining blanket NIL withholding tax certificate would be rationalised on similar lines as currently applicable to Indian branches of foreign banks in the Budget 2020.
While the issue related to the process of obtaining the blanket Nil withholding tax certificate has been resolved in September 2020, ambiguity still remains in the manner in which such reinsurance branches would be taxed in India. Reinsurance branches are hoping that Budget 2021 would introduce for them a special code of taxation that is fair and unambiguous.
The finance Minister recently promised to present a ‘never before’ like Union Budget. Given this, we hope that Budget 2021 would bring much-needed bold reforms to boost the Indian economy.
The writer is Partner and Head of Financial Services Tax, KPMG in India. Bharat Jain, CA, also contributed to the article.
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