DTC TO HAVE SIGNIFICANT IMPACT ON INSURANCE COs.
THE insurance sector is going through a challenging phase with regulatory changes significantly impacting the business model of life insurance firms, in particular. On the direct taxes front, from April 1, 2012 when Direct Taxes Code (DTC) will be implemented the sector may also have to deal with a considerably altered taxation model, which may result in additional compliance and potentially leave room for uncertainty as far as the taxation of insurance companies and policyholders are concerned.
The life insurance sector has always experienced an advantageous position when compared to other taxpayers. To date, they were subject to a concessional tax rate of 12.5% (plus surcharge and education cess) on the surplus disclosed by the actuarial valuation as per the Insurance Act, 1938, less the opening surplus disclosed by that valuation. The DTC proposes to do away with this taxation scheme and tax the profits in shareholders account at the normal corporate tax rate of 30% leaving policyholders funds to be taxed in the hands of shareholders or subject to a distribution tax of 5%.
It provides that proceeds on maturity of life insurance policies (in case other than the death of the policyholder) will be taxable in the policyholders hands, except where the premium paid does not exceed 5% of the sum assured. Life insurers would need to withhold tax at specified rates from these proceeds. Approved equity-oriented life insurance schemes are subject to a distribution tax of 5%, which the life insurers will have to pay with the maturity proceeds being tax-exempt in the policyholders hands.
Some other tax issues for life insurers could be treatment of transfer of funds from shareholders accounts to policyholders accounts and vice versa, applicability of minimum alternative tax (MAT) proposed at 20% of book profits, computation of book profits, if at all MAT is indeed applicable, and a potential disallowance of expenses where tax has not been withheld.
For general insurers, the taxation scheme remains largely the same. The profits as per the profit and loss account (P&L a/c), submitted to the insurance regulator Irda, continue to be the basis of computing the taxable income.
However, an important departure from the current position is that a provision for loss in diminution of the value of investments held by them should arguably be allowable and unrealised gains on revaluation, if any, on revaluation could potentially be taxable, if routed through P&L a/c.
Compliance with withholding tax provisions is another challenge that the sector may find increased. In addition to the withholding tax on maturity proceeds of life policies mentioned above, Indian insurers, and even foreign insurers, may be required to withhold tax from payments that they would make to non-resident re-insurers where the risk resides in India.
Non-resident re-insurers would be subject to income-tax on payments for reinsurance received by them for covering any risk in India, as the said payment would be income deemed to accrue or arise in India and be subject to income-tax at 20%. Ironically, the rate of withholding tax for such payments has not been specifically prescribed and so, the rate of withholding tax from any other income of a non-resident (a residuary rate) should apply. This seems to be an unintended consequence. Lastly, insurance firms having eligible assets in excess of `1crore would also be liable to pay wealth-tax under the DTC.
From a policyholders point of view, the premium that they would pay on life insurance policies would be eligible for a deduction from their gross total income only if the same does not exceed 5% of the sum assured. The limit for this deduction would be `50,000 in addition to the deduction of `100,000 available for contribution to approved funds.
Though there is an overall increase in the deduction limit, it stands reduced for life insurance premium. There are also no proposals to grandfather the existing policies either from the change in the deduction for the premium payment or the exemption of the maturity proceeds (in excess of the premia actually paid) from income tax. Comprehensive and not constrictive was the hope of the insurance industry from the DTC. The sector might just feel that the DTC proposals would further test its resilience in the time of regulatory turmoil.
BY CA BHUPENDRA SHAH
MONEY MATTERS!
In the globalised and fast moving world everyone is busy in fulfilling their greed of earning more money. Most of the people often allow the power of money to control them. The people starts getting up earlier in the morning and working harder, but they fail to understand that ‘Money is the root cause of all evils’. There is the financial cycle which goes on and on. Every one faces it right from childhood till death. As we grow up we go to school, college, and get attached with a company or start our own business. With our growing age our thirst for money also grows up and we are now trapped in Rat Race for rest of the working days. They work for the owners of their company, for the government paying taxes, and for the bank to pay off bills and mortgage. More money does not solve the problem; in fact, it may actually accelerate the problem. Money often gets you in debts instead of helping you to get out of debts. Money often puts a spotlight on what we do not know.
It has found that with the age group of 20- 35 most of the people like to hang out in pubs, purchasing branded garments, cars, house, going for weekends with your loved one and many more. To fulfill that they work hard earn a lofty amount and spend it like anything.
The people purchases more than that of their paying capacity. Easier credit cards and loan facilities from financial institutions encourage the people. When we ask people why they need money? The most common answers we find that they want to get rich or ‘I m in debt so I need to make more money.’
The recent sub prime crisis and bankruptcy of major banks and financial institutions like Bear Stearns, Lehman, AIG, and Washington Mutual are the examples of excessive credits given to the people. To avoid these problems most of the financial institutions have started Debt Counseling for its customers as a ‘goodwill gesture’.
Debt Counseling is one of way to pay off your bills and to get out of debt. “It is a corporate social responsibility initiative.” Debt counseling centers offer advice for all categories of credit—credit cards, personal loans, home loans, and so on. Their services are creditor-neutral, that is, they help you out no matter what institution you borrowed from.
HOW DEBT COUNSELLING WORKS?
Debt counsellors make a holistic assessment of your situation, and give you an appraisal of the costs involved—interest rates, fees, all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42% to 49.36%. When you add the charges, they work out to more than 50%. The next step is to list payments that you, the borrower, can make—dues, equated monthly installments, and so on. The centre can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs. For example a negotiated repayment at 8% simple interest over 36 months. “It’s a win-win situation for banks and customers.” Banks avert a messy recovery process, and get at least the principal back. And borrowers get help paying off dues. All of this, though, applies only if a bank is convinced the borrower is truly willing to pay off bills, and genuinely cannot stick to the original schedule. It (the initiative) has been able to discern people facing genuine difficulties from intentional defaulters.
BEST STRATEGY
Don’t pay the minimum due on your credit card; pay the full amount each month. Don’t take an expensive loan to pay off a previous loan. If you have more than one loan, pay off the most expensive one first. So it makes sense to pay off credit cards, then personal loans, then lower-interest debts. If you must borrow, do so against a security such as property or shares. Such loans (14% to 16% interest) are cheaper personal loans (19% to 21%). And lastly, if you can borrow from helpful relatives to pay off your debt, do so!
UK TO NATIONALISE BANKS
The failure of US financial market has created a havoc in all countries. The most affected countries are US and European countries. In an attempt to save the major financial industry the US outline for $ 700 bn bailout deal. Just like US government saved AIG, UK government has decided to nationalize the troubled banks. Britain’s troubled mortgage lender Bradford & Bingley and is discoing the sale of its saving book and branches, people in banking industry. Branches could be sold: B&B’s ₤ 24 billion($ 44 billion) of savings and its 200 branches could be sold to its rival or rivals. B&B’s books show 3.4% of UK Mortgages.
BIGGER THE SIZE, GREATER THE FALL
Are you one of those who are wondering how the woes of a handful of companies can create a global
financial crisis? Perhaps you should for starters consider just how huge they are. The total revenue of Freddie Mac, Fannie Mae, AIG, Lehman Brothers and Merrill Lynch added up to nearly $322 billion in 2007. There are 185 countries, including fairly developed economies like Denmark or Greece, whose GDP cannot match that size.
In fact, even the combined GDP of the 96 smallest economies doesn’t add up to the aggregate revenues of these Wall Street giants, which were often considered too big to collapse. Between them, the CEOs running these firms had an annual compensation package of close to $118 million last year. In the past decade, which was considered the golden era of the financial industry, most of these companies made pots of money, particularly through real estate loans. Increasing property values were only adding to the profits of these companies who experienced an exponential surge in their revenues.
Things started going sour towards the end of 2006, with the bursting of the housing bubble in the US. Fannie Mae was the first to feel the heat, incurring a whopping $2.3 billion or 26% drop in net income. However, net incomes of the others were still surging.
Freddie Mac even witnessed a recovery after a slowdown in 2005. But, by 2007-end the decrease in inco
mes turned into real losses. Freddie Mac, Fannie Mae and Merrill Lynch started incurring loss from the third quarter of 2007. In the calendar year, Merrill Lynch lost $7.8 billion, which was more the $7.5 billion it has earned as net income in 2006.
The losses of Freddie Mac and Fannie Mae were respectively $3.1 billion and $2.1 billion.Although AIG still made profits for the year as a whole, it had also started incurring losses from the last quarter of 2007. As a result its net income over the year fell 56% from the $14 bn it made in 2006.
Lehman Brothers was the only exception, because it did not incur any loss in 2007. In fact, there was a
slight increase in the yearly profits from $4 billion to $4.2 billion. But it also joined the loss makers league when it lost $2.8 billion in the first quarter of 2008, a loss which was more than half the net income generated in all of 2007.
This dramatic roller coaster of profits and losses is perhaps best summed up by a quote of former Morgan Stanley MD Anson Beard: “If you’re betting with other people’s money, you’re more willing to take risk than if it’s your own.”
Given that mindset, it’s also easy to see why some have characterized what’s happened as ‘privatisation of profits and nationalization of losses’.
To Americans who were already debating the waste of taxpayer’s money in waging wars in Iraq and Afghanistan, the $900 billion and more of taxpayer money used for bailing out some of America’s largest financial giants is a staggering burden. This amount is nearly five times the $182.2 billion estimated as the expenditure for the war on terror for FY 2008. (TOI)