The insurance industry has sought a review of the Budget proposal on taxing the income from aggregate premium above Rs 5 lakh. In a meeting on Tuesday with finance minister Nirmala Sitharaman, executives of life and general insurance companies are understood to have sought a higher threshold of premium for levying tax as well as a reduction of the 18% rate of goods and services tax on insurance.
Sources said they have also sought another meeting with finance ministry officials to discuss their concerns in detail.
“The meeting with the finance minister was organised by CII on Tuesday. The representation happened through CII,” said insurance industry sources.
The main demand was to increase the threshold premium for taxation for non-ulip products from the proposed 5 lakh to10 lakh. The government, in its Budget, has proposed to tax income from all non-ULIP products, that is par and non-par where aggregate insurance premium paid in a year exceeds Rs 5 lakh. The proposal will come into effect from April 1, 2023.
Official sources have, as of now, indicated that a review of the proposal is not on the cards. “The tax is aimed at only those who are using insurance as a means to save tax. How many households in India are able to pay Rs 5 lakh a year as insurance premium? It is not by everyone,” noted a source.
However, a senior executive of a life insurance company pointed out that the premium (for high-ticket products) is mainly to build a corpus. “If proceeds for premium over 5 lakh is taxed, then the required corpus (for policyholders) will not be created. And if you want to tax super HNIs and HNIs, then5 lakh is not necessarily the threshold. So, to increase the premium level for taxation is more reasonable,” he told FE.
“If you don’t have long-term capital gains and if you tax income from other sources for non-unit linked endowment policies, then you might land up with less than zero percent real return with high inflation,” the executive further pointed out.
“Our view is that the proposed taxation will have an impact on the insurance industry. If our objective is to grow insurance penetration, then this tax would not support it,” HDFC Life Insurance Chief Financial Officer Niraj Shah said.
The country’s life insurance industry is likely to witness a drop in sales of high-ticket non-participating products from April following tax-related Budget announcements, according to analysts. The introduction of the new taxation is aimed at disincentivising insurance purchase motivated by tax exemptions, the analysts observed.
“This might not have been the right timing for introducing this tax in my view. We are just coming out of Covid. The insurance sector settled over Rs 60,000 crore of claims. The country’s insurance penetration is fairly low and the insurance gap is very high,” HDFC Life Insurance MD & CEO Vibha Padalkar had told FE.
Leading private sector life insurers like HDFC Life Insurance, ICICI Prudential Life Insurance, SBI Life Insurance and Max Life Insurance, among others, are expected to take a hit due to this proposed tax.
“While protection segment will not be impacted (given that proceeds come on death and even in ROP cases there is no major income after deducting the premiums already paid), we expect non-par products will be impacted the most, given the higher ticket sizes,” JM Financial Institutional Securities said in a note.
According to Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance, introduction of the new tax is a bit of a ‘dampener’ for the insurance industry and for increasing penetration of insurance and household financial savings in India.
“We have seen a structural shift in government stance to remove tax exemptions on insurance…tax exemptions were removed on insurance returns for ULIPs with annual ticket-size of more than 250,000 at an individual level in FY22. And now, a similar thing has been done on insurance returns for non-ULIPs with annual ticket size more than500,000 at an individual level in FY23 budget. As such, death benefits remain the only tax exemption available now for high ticket-size products,” ICICI Securities said in a note.
The issue of a reduction in GST rate on insurance is under review by the Group of Ministers on rate rationalisation and may be taken up at a later date. Insurers have pointed out that the tax rate is very high and works at counter-purpose especially when there is an effort to further insurance penetration in the country.
