Non-life premia likely to pay price of new tax on insurers

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New Delhi: 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 P&L 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 & 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.