Insurance and the Direct Tax Code

Insurance and the Direct Tax Code
The DTC, which will become effective from April 1, 2012, has a
number of implications for the insurance sector – both life and nonlife.
Here’s a look at the proposals that will affect policy holders and
companies…
IMPLICATIONS FOR POLICYHOLDERS
Deductions under Section 80C - Presently, deductions under Section 80C
are available, up to 1 lakh, for various investment instruments including
premium paid for life insurance, provident fund, etc. Under the DTC, only
sums paid to towards a contract for an annuity plan of any insurer (subject to
it being an approved plan) is eligible for a deduction of up to an aggregate
limit of 1 lakh (along with other approved funds).
Deduction of LIC premiums:
It is also proposed that premiums paid to LIC should be included in the
additional deduction of 50,000, which is currently available to other payments
such as health insurance and education of children. An important condition,
however, is that only those insurance policies where the premium does not
exceed 5 per cent of the capital sum assured in any year during the term of
the policy would be eligible for this deduction.
Tax free investments: As the EEE (Exempt-Exempt-Exempt) system of
taxation (i.e. contributions are tax free, accretions are tax free and
withdrawals are also tax free) will continue, long-term savings instruments
such as contributions to provident funds, approved superannuation funds, life
insurance, gratuity funds, etc. will continue to be tax free.
Tax on maturity proceeds -
DTC provides that proceeds on maturity of life insurance policies (in cases
other than the death of the policyholder) will be taxable in the policyholder’s
hands. The exception, however, is in the case of polices where the premium
paid does not exceed 5 per cent of the sum assured or the insurer has paid
distribution tax. In such cases, the life insurance company would have to
withhold tax at specified rates from these proceeds being paid to policy
holders. In the case the policy holder is an individual or has HUF status the tax
withheld will be at the rate of 10 per cent, in the case of any other deductee,
the withholding would be at the rate of 20 per cent, where payment exceeds
10,000.
IMPLICATIONS FOR COMPANIES
Life Insurance Companies
Higher corporate tax -Presently, life insurance companies are subject to a concessional tax rate of12.5 per cent (plus surcharge and education cess) on the surplus disclosed bythe actuarial valuation, as per the Insurance Act, 1938, less the openingsurplus disclosed by that valuation. Now, DTC proposes to do away with thisInsurance and the Direct Tax Code Page 1 of 3taxation scheme and proposes to tax the profits in the shareholders’ accountat the normal corporate tax rate of 30 per cent, leaving policyholders’ funds tobe taxed in the hands of shareholders.
Distribution tax - In addition to corporate tax, insurers will have to pay a 5
per cent distribution tax on the income distributed or paid to policyholders, in
case of ‘approved equityoriented life insurance schemes’. These are life
insurance schemes where more than 65 per cent of the total premiums
received are invested in equity shares of domestic companies.
General Insurance Company
No significant change - The taxation scheme remains more or less the same
as existing presently. The profits, as per the profit and loss account submitted
to the insurance regulator IRDA, continue to be the basis of computing the
taxable income.
Other provisions which impact the insurance sector
Any insurance premium, including re-insurance premiums accrued from or
payable by any resident or non-resident, in respect of insurance covering any
risk in India, is deemed to accrue or arise in India and is subject to tax in
India. Such payments are subject to withholding tax at the rate of 20 per cent
on a gross basis, without any deduction for expenses.
Apart from the above change, the definition of ‘Permanent establishment’
has been expanded to include the person acting in India on behalf of a nonresident
engaged in the business of insurance, through whom the non-resident
collects premiums in India/ insures risk situated in India. However, if a tax
treaty provides a definition narrower than what has been prescribed under the
DTC, then that definition would apply.
Under the DTC, an important departure from the present position is that a
provision for loss in the diminution of the value of investments held should be
allowed and unrealised gains on revaluation, if any, on revaluation could
become taxable, if routed through the Profit and Loss Account statement.
MAT would be charged on both the companies