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Insurance regulator for lower corporate tax

New Delhi, Jan. 20: The Insurance Regulatory Development Authority (IRDA) is lobbying the government to slash the corporate tax on life insurance companies from the current level of 12.5 per cent of their valuation surplus.

Corporate tax on insurance companies was once taxed at 55 per cent. However, since 1977, the method of tax computation was changed to 12.5 per cent of their valuation surplus. Unlike other companies, insurance companies are not taxed on shareholders’ profits.

IRDA chairman N. Rangachary said that corporate tax for other companies had been progressively brought down to 35 per cent plus a 5 per cent surcharge, but the flat 12.5 per cent of valuation surplus — a method worked out when LIC was the only life insurer around — had remained unchanged for the past 35 years.

“IRDA has suggested that there is a need to lower taxation on life insurance companies as well,” Rangachary told newspersons on the sidelines of the third international conference for emerging markets here today.

In another recommendation, Rangachary said, “We have recommended that the surplus which accrues to the shareholders should be taxed at the normal rates of whatever the corporate tax is, but policyholders should either not be taxed or be taxed somewhere between 3 per cent to 5 per cent.”

Insurance companies have been arguing that the tax rate on emerging surplus — which is distributed to policyholders in the form of bonus — should be trimmed from 12.5 per cent to around 8 per cent. Moreover, they have said that no tax should be levied on the surplus distributed if the surplus comes out of shareholders’ funds.

In the last budget, the government had proposed to impose a 5 per cent service tax. However, after a lot of hue and cry from the life insurance companies this tax was withdrawn. Subsequently, it was only put on the risk element of the policies sold to the policyholder.

Rangachary also recommended: “Since there is no lowering of risk perception on terrorism, non-life companies should be allowed to treat catastrophe reserves as deduction for the purpose of taxation.”

The IRDA chairman said the annuity payment made by life insurance companies running the pension business must be exempt from tax. “If the government is not agreeable to 100 per cent exemption, then at least pension up to Rs 50,000 per annum should be tax free.”

The insurance regulator also cautioned insurers about mismatch in their assets and liabilities and new types of risks like terrorism and catastrophes.

“Asset-liability management will become some sort of a worry if there isn’t many long term and safe investment avenue available. With capital markets dormant, where will the investments of the insurance sector go,” asked Rangachary.

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