Rajesh Sud, CEO & MD of Max Life Insurance, says the Indian life insurance market faces numerous challenges for growth and is among the least profitable across Asia.
Given the current challenges, what, in your opinion, would make for a good budget? What measures or proposals would you like to see?
The budget could be a useful pointer to the continued intention of the government towards reforms. In that respect, this budget could hold more relevance for the economy as well as capital markets. Some of the critical challenges and measures with respect to the Indian economy are as below:
Fiscal deficit is a big concern. The finance minister has been signalling his commitment to rein in the fiscal deficit. The government should try and control the deficit through reduced government expenditure and creating more revenue opportunities
Households seemed to have favoured investment in valuables, such as gold, This created pressure on our currency exchange rate due to high imports of gold and also worsened the fiscal deficit of the country and hence needs to be reversed.
The government has been unable to meet disinvestment targets and should focus on bringing back the private investment gradually to lift sustainable growth. At the very least he is likely to signal his commitment to further stake sales in PSUs (public sector units).
The wholesale price index has stabilised but the consumer price index is still in double digits. Removal of subsidy on diesel prices and increase in prices of other commodities may have a further impact on inflation. Balancing inflation and growth is a big task before the government.
While the Food Security Act may also be introduced in this session and lead to an increase in the food subsidy bill, the finance ministry can announce steps to reduce the fertiliser subsidy by raising urea prices, which would be a big positive.
There has been a decline in the average saving rate since 2008/09. RBI estimates show that the net financial saving of the household sector declined further, to 7.8 per cent of GDP (gross domestic product), at current market prices in 2011/12 from 9.3 per cent in the previous year and 12.2 percent in 2009/10. The moderation in the net financial saving rate of the household sector during the year mainly reflected an absolute decline in small savings and slower growth in households' holdings of bank deposits, currency as well as life insurance funds.
In view of dented disposable income in the hands of individuals, the finance minister should provide relief in the income tax burden borne by individuals, especially in the lower tax bracket, so that the household savings rate can be maintained
In a country like ours, there is also a constant need for better physical infrastructure, higher quality education and better skilled labour. Therefore, the government should continue its focus on assured employment programmes, infrastructure programmes related to roads, power, irrigation, and ensure easy access to health and education.
Announcing the intention to introduce several pending bills such as those on insurance and pension and land acquisition would also be positive.
Given the constraints the government faces in raising revenue, do you see a case to increase income tax rates on the rich?
We are not in favour of raising tax rates as stability in the tax regime is necessary for the economy. Increasing tax rates may also lead to more tax evasion. Instead of increasing tax rates, it would be more effective to widen the taxpayer base. The finance minister can re-emphasise his willingness to implement the GST (goods and services tax) before the present government completes its term, something which the market is increasingly sceptical about and also announce implementation of the direct tax code.
If the budget does not meet expectations, do you fear that business sentiment would once again dip?
There may be a dip in sentiment. The major action - reducing diesel subsidies, implementing GST, introducing important bills, expediting project clearances, even raising rail tariffs - is happening outside the budget. Hence it is unlikely a budget will swing the needle too much. The downside of course is the introduction of any large populist measures such as farm debt waiver, which may not be taken well by the markets.
Which budget, in the recent past, do you remember as having been a good one?
The past few budgets lacked clarity. However, attempts to consolidate the fiscal deficit are welcome steps.
Specific to your sector, what could the current budget do to improve conditions?
Suggestions on core issues related to life insurance that could improve the current situation are mentioned below:
A) Personal Income Tax
India's insurance penetration dropped to 3.4 per cent in 2011/12 (from 4.4 per cent in 2009/10 and 4.2 per cent in 2010/11 (Swiss Re). It is expected to fall further to nearly 3 per cent in 2012/13.
Promoting the long-term savings habit by providing a separate limit for life insurance premiums under section 80C of Rs 1.5 lakh within an overall enhanced limit of Rs 3 lakh will help in not only increasing life insurance penetration but at the same time galvanise long-term funds for infrastructure
Currently, payment towards pension is a part of 80C and annuities are also taxable. There is no additional incentive for individual investors to put money in the pension segment. With the average life span of Indians increasing and the absence of social security along with inadequate retirement savings (provided by employers/government) a separate limit of Rs 1 lakh must be created and tax on annuities must be abolished to strengthen pension inflows
B) Corporate Tax
The Indian life insurance market faces numerous challenges for growth and is among the least profitable across Asia. The budget should address issues that will help make this industry attractive for both policyholders and shareholders. Corporate tax is currently governed by Section 44 along with rules contained in the First Schedule of the Income Tax Act, 1961. Accordingly, tax is calculated @12.5 per cent basis actuarial valuation made in accordance with the Insurance Act, 1938. This levy of taxes, directly or indirectly, on amount to be received along with effect of inflation considerably reduces the value of money for policyholders. We propose corporate tax be calculated basis profits disclosed in Shareholders Account at 12.5 per cent prepared as per IRDA (Insurance Regulatory and Development Authority).
C) Indirect Tax
We propose service tax on new business (other than single premium) /renewals be at one per cent to bring parity with other financial products such as fixed deposits and mutual funds.
Presently, service tax is paid on due or receipt of amount, whichever is earlier. However, some amounts due are never received; similarly amounts received in advance with proposals are not converted into policies. Considering the nature of life insurance, service tax liability should be on the basis of receipt of amount and subsequent conversion as premium
D) Other Suggestions
TDS (tax deducted at source) threshold on agent commission should be to Rs 50,000 since most life insurance agents are now in the low-income bracket. Any increase in the limit will result in a lower administrative burden on the tax department while processing refunds. Agents also will have more disposable income.
The service tax threshold exemption should be extended to life insurance agents to iron out disparity with other financial products distributors.