<p>The word ‘insurance’ gathered significant attention when the world was hit by the Covid-19 pandemic. Globally, people realised the importance of insurance covers to protect one’s life, health and assets in case of unforeseen events. With a proportionately smaller amount of premium, the insurance companies cover relatively high risks or losses of the insured in the form of claims. When it comes to claims, each policyholder expects to recover the maximum from the insurance companies to cover their losses or expenses. Similarly, a fair consideration is required towards the expectations of the insurance industry, which has played a pivotal role in safeguarding people in case of unanticipated happenings. </p>.<p>Insurance is a niche business that operates differently and has its inherent challenges within the regulatory framework. The lawmakers are cognisant of this fact and some issues are addressed periodically by them. The tax law also provides a separate tax regime for insurance companies under the Income-tax Act, 1961 (IT Act). </p>.<p>The tax regime for insurance companies was enacted when there was only one government owned life insurance company. The computation methodology inserted in 1976 relied on certain actuarial valuations as per the Insurance Act, 1938 for computing taxable profits of a life insurance company. In the year 1999, the Insurance Regulatory and Development Authority of India (IRDAI) was set up along with its regulations. Since then, the existing computation mechanism, which is not in line with the regulatory changes, fails to determine the correct income and its amendment is yet to see the light of day. The computation mechanism for life insurance companies needs to be aligned with regulatory changes and Form-I. Similarly, reinsurance companies are awaiting for a dedicated mechanism for computing their taxable income. The current mechanism is falling short of granting a mechanism for computing the income for taxation considering the fact that the reinsurance branches maintain their financial accounts in India and are also subject to audit or inspection under the IRDAI regulations. Hence, reliance on world income is not required for computing their taxable income. Reinsurance branches have also raised concerns about being taxed at the maximum rate of 43.68% (being considered as non-residents for taxation) when the life and general insurers are taxed at an effective rate of 14.56% and 25.16% respectively. A reinsurer underwrites the risk of life and general insurance companies and hence expects to have a parity in the tax rate. A similar parity is expected for excluding the general and reinsurance companies from the applicability of the Minimum Alternate Tax (MAT) provisions, similar to life insurance companies.</p>.<p>The newly inserted tax withholding provision of section 194R (to tax the benefits/ perquisites at source) in the IT Act poses a risk of double taxation at source and a compliance burden on insurance companies which are specifically complying with the provisions of section 194D of the IT Act on all payments to the agents appointed for soliciting/ procuring insurance business. Hence, the insurance industry seeks exclusion from the applicability of section 194R of the IT Act as payments made by them are specifically covered under section 194D of the IT Act.</p>.<p>The insurance sector in India has come a long way from the establishment of the first insurance company in 1818. IRDAI has been a strong pillar of support for the insurance sector over the years. The Government has also shown its intent of supporting and developing the insurance sector in recent times. As we approach the new Fiscal Year 2023-24, the insurance sector is hopeful of getting some impetus from the Budget 2023 on the taxation front as well.</p>.<p><em>(The author is Partner & Leader - Financial Services Tax, BDO India)</em></p>
<p>The word ‘insurance’ gathered significant attention when the world was hit by the Covid-19 pandemic. Globally, people realised the importance of insurance covers to protect one’s life, health and assets in case of unforeseen events. With a proportionately smaller amount of premium, the insurance companies cover relatively high risks or losses of the insured in the form of claims. When it comes to claims, each policyholder expects to recover the maximum from the insurance companies to cover their losses or expenses. Similarly, a fair consideration is required towards the expectations of the insurance industry, which has played a pivotal role in safeguarding people in case of unanticipated happenings. </p>.<p>Insurance is a niche business that operates differently and has its inherent challenges within the regulatory framework. The lawmakers are cognisant of this fact and some issues are addressed periodically by them. The tax law also provides a separate tax regime for insurance companies under the Income-tax Act, 1961 (IT Act). </p>.<p>The tax regime for insurance companies was enacted when there was only one government owned life insurance company. The computation methodology inserted in 1976 relied on certain actuarial valuations as per the Insurance Act, 1938 for computing taxable profits of a life insurance company. In the year 1999, the Insurance Regulatory and Development Authority of India (IRDAI) was set up along with its regulations. Since then, the existing computation mechanism, which is not in line with the regulatory changes, fails to determine the correct income and its amendment is yet to see the light of day. The computation mechanism for life insurance companies needs to be aligned with regulatory changes and Form-I. Similarly, reinsurance companies are awaiting for a dedicated mechanism for computing their taxable income. The current mechanism is falling short of granting a mechanism for computing the income for taxation considering the fact that the reinsurance branches maintain their financial accounts in India and are also subject to audit or inspection under the IRDAI regulations. Hence, reliance on world income is not required for computing their taxable income. Reinsurance branches have also raised concerns about being taxed at the maximum rate of 43.68% (being considered as non-residents for taxation) when the life and general insurers are taxed at an effective rate of 14.56% and 25.16% respectively. A reinsurer underwrites the risk of life and general insurance companies and hence expects to have a parity in the tax rate. A similar parity is expected for excluding the general and reinsurance companies from the applicability of the Minimum Alternate Tax (MAT) provisions, similar to life insurance companies.</p>.<p>The newly inserted tax withholding provision of section 194R (to tax the benefits/ perquisites at source) in the IT Act poses a risk of double taxation at source and a compliance burden on insurance companies which are specifically complying with the provisions of section 194D of the IT Act on all payments to the agents appointed for soliciting/ procuring insurance business. Hence, the insurance industry seeks exclusion from the applicability of section 194R of the IT Act as payments made by them are specifically covered under section 194D of the IT Act.</p>.<p>The insurance sector in India has come a long way from the establishment of the first insurance company in 1818. IRDAI has been a strong pillar of support for the insurance sector over the years. The Government has also shown its intent of supporting and developing the insurance sector in recent times. As we approach the new Fiscal Year 2023-24, the insurance sector is hopeful of getting some impetus from the Budget 2023 on the taxation front as well.</p>.<p><em>(The author is Partner & Leader - Financial Services Tax, BDO India)</em></p>