Insurance premia on health, fire, motor, marine and engineering policies could rise sharply with the government deciding to impose a 30% tax on the investment income of non-life insurance companies.
"The government has inserted a clause in the Finance Bill, 2009 specifically saying that as per the Irda format, profit on investments should be routed through the PandL account, meaning all realised gains should be taxed as business income. So, the entire thing which was not taxed till now, which we are on appeal at various stages, will be taxed," said M Ramadoss, chairman and managing director of Oriental Insurance Company Ltd.
Private non-life insurance companies as well as the four public sector general insurers will have to pay tax on profits earned on sale of equities starting from April 1, 2011, according to Budget 2008-09. "All the four companies make a profit of about Rs 2,000 crore annually and the tax thereon will be 30%. That much (Rs 600 crore) profit will be eroded, which could have been used as capital. If I start paying so much (tax), what will happen is my margin is under pressure and I will start increasing the premium. Tomorrow, you (the government) can't ask me to do aam admi policies as we won't be able to do that," he said. Oriental Insurance made a profit around Rs 380 crore in 2008-09 on sale of equities.
The four state-run general insurers-Oriental Insurance, New India Assurance, United India Insurance and National Insurance-controlling almost 60% of the non-life market, will have to bear the new tax. "We may have to raise premiums. You are closing my only window of relief unnecessarily. With this clause, all my earlier investments are also at stake because somebody can come and question them. It will be open to interpretation," Ramadoss said. The move is painful at a time of rising competition, increasing underwriting losses and deteriorating capital generation, he said.
Ramadoss said the general insurers plan to take up the matter with the finance ministry since there is time for changes till the Finance Bill is enacted by Parliament. "It is a double-whammy. Since capital gains are not applicable to us, I don't get any deduction on long-term capital gains. So I am in a situation where I don't even get the benefit of long-term capital gains, whereas every citizen of India is getting it," he said.
The new tax, though, could pacify the tariff war that started with the de-tariffing of insurance product pricing in January 2008. General insurers have cut premiums by as much as 60% till now. However, they feel the segment was not yet mature enough and suffers from underwriting losses.
"We opened the industry five years back, the de-tariffing happened two years back. Internationally, underwriting profits are not more than 5%. Indian companies are suffering underwriting losses. The moment you start making underwriting profits you are supposed to be making profits at the cost of public because premium rates shoot up. Motor rates are the least in India," Ramadoss said.
The Finance Bill 2009 has stated, "It is proposed to amend the provisions of the Income-tax Act to provide that any increase in respect of any amount taken credit for in the accounts of account of appreciation of or gains on realization of investments in accordance with the regulations prescribed by Irda shall be treated as income and included in the computation of total income.
Similarly, deduction shall be allowed in respect of amount either written off or provided in the accounts to meet diminution in or loss on realization of investments in accordance with the regulations prescribed by Irda."
Source: Indian Express Finance
