With strong fundamentals the Indian economy has tremendous potential to grow at 8-9% a year. Currently however it is at a phase where it is critical for the Finance Minister to strike a right balance between growth and inflation while improving consumption at the same time. The three major concerns that the country’s macro health reels under are fiscal deficit, inflation and the current account. A few core issues both in the proposed union budget and the final DTC proposal are: Indian economy – Health The government should try and reduce the fiscal deficit through reduced government expenditure and not through raising taxes as it is known to have negative effects. Government should also not depend on one time revenue flow like 3G Spectrum auction, to reduce fiscal deficit.
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The high inflation rates also pose as a potential risk to the economy. This may be corrected by implementing reforms which address the issue to supply side bottlenecks to match the growing demand arising from increase in income. Keeping this in view high, inflation which has significantly dented disposable income in the hands of individuals, Finance Minister should provide relief in income tax burden to individuals especially in lower tax bracket so that household savings rate could be maintained.
ReplyDeleteThere is also a need for better physical infrastructure, higher quality education, higher skill quality labour, and increased agricultural productivity. Therefore, the Government should continue its focus on assured employment programs, infrastructure programs related to roads and easy access to loans for companies to support GDP growth rate of above 8 per cent
ReplyDeleteThe other major risk relates to the current account. Currently the current account has been at a deficit of around 3% of the GDP. This alone may not cause alarms but what does is the recent change in the nature of foreign capital inflows. The decline in FDI could be a combination of difficulties faced by the FDI investors in clearing environment and regulatory hurdles. This issue could also be addressed by change in regulatory framework.
Specific to Life Insurance Industry
ReplyDeleteInvestments in saving instruments including risk cover, pension products, etc are eligible for aggregate deduction of Rs 1 Lakh. We recommend a separate limit for tax exemption for long-term saving instruments like life insurance or increasing the limits on life and health insurance premium could be looked at.
The proposed DTC provides deduction of Rs 50,000 for life cover, health cover and tuition fees. Life insurance products may see a downside as amount of Rs 50,000 may be exhausted for paying tuition fee alone for kids. We suggest that limit should be increased and should be wholly and exclusively for life insurance products to a minimum of Rs.1.5 lacs.
Presently amount paid towards life Insurance policy is allowed for deduction. There is no tax impact on accretions also maturity/benefit is exempt from tax. As per the proposed DTC, amount received as proceeds from a Life Insurance policy will be taxable as income from residuary source. We believe, payments on maturity should be allowed as deduction without any condition. Survival benefits (interim payments) should also be treated as payment on maturity. EEE should continue to be applicable to policies issued prior to enactment of DTC as policyholders’ have invested with the intent of a tax free maturity proceeds.
Service Tax is currently borne by the policyholders, any relaxation would promote savings in life insurance
MAT applicability on Insurance companies could also be relooked at as it has a long gestation period. Even the proposed DTC mentions MAT applicability and credit being allowed for carry forward for 15 years in the new DTC. If at all MAT be applicable, it should be at reduced rates based on financials as prepared under IRDA guidelines.
· The 5% distribution tax proposed under the proposed DTC should be relooked at. Currently there is no such provision and indirectly it seems taxation of Policyholders’ Account. This will result in less payout to policyholders on maturity/death.
· The current rate of taxation of a Life Insurance Company is 12.5% and the proposed DTC does not specify any limit specifically for the same. This would mean being taxed at the general rate of 30% for a company. A significant portion of funds of Life Insurance companies are invested in infrastructure projects of the country. Also companies incur huge losses initially due to long gestation period of the sector. With higher tax rates, it will be unattractive proposal for new investors to invest in the sector. We recommend to charge concessional rate of tax on profits as is existing under current Income Tax Act.
ReplyDelete· Increased FDI ceiling to 49 % can bring in the much-needed capital for the growth of the sector and long-term development. This will also enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration