Simplify tax laws to improve insurance penetration

Feb 19 2013, 09:08 IST
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SummaryGovernments around the world generally agree on the issue of incentivising buying of insurance policies, both life and non-life, through tax laws for achieving the twin objectives of promoting social security and mobilising long-term funds for economic development.

Governments around the world generally agree on the issue of incentivising buying of insurance policies, both life and non-life, through tax laws for achieving the twin objectives of promoting social security and mobilising long-term funds for economic development.

There are many ways of using taxation as a tool for achieving these goals, the simplest being allowing the premium amount as deductible from the total taxable income while computing tax liability of an individual or a legal entity

The other method is to exempt claims proceeds from any kind of tax, be it maturity or death claim amount, for life policies and the amount paid to indemnify loss of goods, property or any physical asset due to accident, fire theft or natural disaster, etc. In our country, a large segment of people look at insurance as a sure tool of escaping taxes on their income and, at the same time, are motivated to opt for insurance for long-term savings and for providing financial security to their family or business.

Over a period of time, tax implications and the exemption rules have become complicated and, at the same time, there have been uncertainties every year about how the tax treatment is going to be like following the Budget exercise by the government every year. The imposition of the service tax has further complicated tax issues and the perpetual uncertainties about the Direct Taxes Code has literally confused not only the buyers of a policy, but also the sellers.

Tax issues in insurance have far-reaching implications. When somebody decides to buy any insurance policy, he commits himself to its terms and conditions for a very long term. The existing tax law is also one of the factors influencing his decision and he would expect all such conditions to remain the same till he keeps renewing his policy in chain.

The tendency to fiddle with such rules frequently is, therefore, fraught with serious consequences, which may not only hamper growth, but also harm the interest of customers.

So far as tweaking with the slab of income for levying tax or the revision in tax rates are concerned, the industry should not have any concerns as these matters are decided in view of the total economic scenario and are subject to the government’s discretion; but changing the basic structure of taxation may hamper growth of the industry. The following factors, therefore, may be considered by the policymakers:

The tax

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