With the new Direct Taxes Code likely to be introduced in Parliament for discussion in the winter session, life insurance companies have already started expressing grave reservations against it.
Apart from concerns on the proposals for asset-based taxation and the move to the EET (exempt exempt tax) regime, a major issue for companies is if Unit Linked Insurance Policies (ULIPs) have been included under tax deduction schemes. According to Mr Vikas Vasal, Executive Director, KPMG, the Direct Taxes Code requires clarification on whether ULIPs will attract a tax deduction or whether they have been excluded.
For most private insurance players, ULIPs constitute anywhere around 60-70 per cent of their portfolio. Moreover, they are popular among customers as they are more transparent and simplified in their cost structure. “Under the Direct Taxes Code, ULIPs have not been mentioned for an individual to claim deduction. Currently, under Section 80C of the Income-Tax Act ULIPs have been mentioned as separate from life insurance premiums,” said Mr Vasal.
Commenting on this, Mr Harpal Karlcut, CEO, Canara HSBC Oriental Bank of Commerce Life Insurance, said, “It is not for the Government to decide for the consumer on what policy one needs to purchase. We hope ULIPs have been included for deduction as before as they constitute a majority of the business for most insurance companies. ”Among other reservations on the Direct Taxes Code, companies feel that while the proposal to increase the tax deduction limit to Rs 3 lakh from Rs 1 lakh may be a welcome move, the imposition of the EET regime and the asset based taxation like Minimum Alternative Tax (MAT) may prove to be an undoing for the industry. “The code proposes an increase in the five times multiple (insurance cover to premium ratio) to 20 times. We believe that it can be reduced to a more reasonable amount like 10 times,” said Mr Puneet Nanda, Executive Vice-President, ICICI Prudential Life Insurance. He adds that the move to the EET regime would result in double taxation as the principal investment itself may be taxed in some cases. “This may not be desirable in the absence of other social security schemes for the retiree segment,” he said.
On the proposal for asset based taxation, which suggests an increase in the corporate tax to 25 per cent from 12.5 per cent or MAT at 2 per cent of gross asset value, whichever is higher, Mr Karlcut said that it would only result in companies passing on the higher costs to consumers. “Our assets actually belong to the customer and if we have to pay a higher cost, we will be forced to pass it on to the customer,” he said.
