Private life insurers could get 20-year tax holiday if demand is met

Venkatachari Jagannathan
26 November 2000

With Insurance Regulatory and Development Authority (IRDA) starting to issue licenses to private players, these players have begun focussing on forcing the government to give them an attractive tax structure. The centre has formed an 11-member committee under the chairmanship of Mr. V.U. Eradi, former member, Central Board of Direct Taxes (CBDT), to look into the issue of tax structure for life insurance companies in a liberalised environment that would be at par with international standards.

According to industry sources, prospective private life insurers are lobbying for a tax rate of 12.5 per cent of the valuation surplus (difference between assets and liabilities excluding shareholders funds) or at corporate tax rate on investment income net of all expenses, whichever is lower. Currently, Life Insurance Corporation of India (LIC) is taxed at the rate of 12.5 per cent of its valuation surplus.

Opines Mr. R. Ramakrishnan, member, Malhotra Committee on Insurance Reforms and an actuary, "If the government yields to the demand, then no new life insurer will pay any income tax for the next 20 years." According to him, investment income net of all expenditure will always be negative during that time period, whereas the surplus will grow by leaps and bounds from the fifth year onwards.

Not only that, it will be inequitable for the public sector LIC as it is forced to invest a major portion of its funds in social sectors and which will continue to be taxed while private players go scot free. Speaking about LIC's investments in the social sectors, Mr. G.N. Bajpai, the corporation's chairman says, "As on March 31, 2000, LIC has investments in various social sectors amounting to Rs. 144,158 crore. For the IXth Plan, we will be contributing Rs. 79,666 crore, up by Rs. 23,569 crore as compared to our contribution to the VIIIth Plan." ().

"The government can adopt UK or Singapore tax models if it wants the Indian regulations and rates to be at par with international standards," Mr Ramakrishnan suggests. According to him, UK life insurers pay the higher of the following two: around 25 per cent of their valuation surplus or corporate tax rate on investment income net of expenses. In Singapore, a flat tax rate is charged on the premium income of the life insurers.