Reinsurance payments not to be liable for TDS
As of today, the income tax department requires that there be a tax deduction at source (TDS) for all reinsurance transactions. General insurers, as part of their overall risk management, cede a part of the premium received to reinsurers including foreign reinsurers apart from the national reinsurer (GIC Re). These foreign reinsurers generally do not have any permanent establishment in India and hence do not attract the provisions of Section 9 of the Income Tax Act (Income deemed to accrue or arise in India).
Reinsurance is a globally driven market and withholding of tax is not a normal practice anywhere in the world. The UN Model Convention on taxation specifically exempts reinsurance from deeming accrual of income, notwithstanding the fact that the premium or risk may pertain to the territory of any particular country. India has in some of its treaties with other countries, followed the UN Model Convention, which is an indication of intent with respect to taxation of such payments.

Withholding of tax would discourage the reinsurers and could also lead to a situation where the pricing of reinsurance premia could get adversely impacted. Therefore we would like the Central Board of Direct Taxes to issue appropriate circulars clarifying that such payment would not be liable to TDS.

Exempting personal insurance from service tax
There is an overwhelming demand across all players in the industry that individual health insurance policies should be totally exempt from service tax. Exemption of health insurance from the service tax will make health cover affordable and accessible for the layman. Consequently, cheaper health insurance will increase its pan India penetration. Additional IT exemption for householders policies and concessional IT rates will give a fillip to home insurance and will also reduce the burden on the government in the event of catastrophes ( CAT events).

Exemption from IT for profit on sale of investments
In order to encourage general insurance players to be active participants in the capital markets, there is a requirement for specific exemption from income tax on profit on sale of investments.

The issue of admissibility of unexpired premium reserves (UPR) as per Insurance Regulatory and Development Authority (IRDA) regulations rather than as per Insurance Act only, for IT deductions. The UPR is at present restricted to the extent of limits specified in rule 6E of the income tax rules due to which insurance companies need to pay income tax beyond their profit disclosed in their audited accounts. Hence, the UPR created as per IRDA regulations should be allowed as per rule 6E.

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e-mail: Ajay Bimbhet

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