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Wednesday, Mar 16, 2005

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Fringe benefit tax may hit group superannuation schemes

Radhika Menon

The question of why employers should bear the additional burden, especially when superannuation is not compulsory, is echoing throughout the insurance sector.

Mumbai , March 15

THE Budget has upset Mr Nilesh Sathe's business plans. As the chief of pension and group insurance schemes at LIC, he is worried that the proposed fringe benefit tax (FBT), if implemented, may severely hit LIC's superannuation schemes.

Group superannuation schemes are generally designed for corporates to enable them to pay retirement benefit to their employees.

As the market leader in group insurance, LIC holds a corpus of Rs 9,018 crore in superannuation schemes alone. Almost all of LIC's group insurance business comes from corporates. This might soon come under threat.

"Hypothetically speaking, if all the companies suddenly withdraw from the scheme, one option for us is to sell off our investment. Since our investments constitute 50 per cent of the Government securities, our offloading will drastically affect market composition. If we decide not to offload, we will have to pay these companies from our current revenue. This will once again affect all our future investments."

The question of why employers should bear the additional burden, especially when superannuation is not compulsory, is echoing throughout the insurance sector. LIC has taken up the issue with the Finance Ministry.

"The private companies might just close all their group superannuation schemes. The ramifications are huge. But we believe our clients are not going to suddenly bail out in spite of the tax. But one thing is for sure, the future business holds no prospects," he said. The ceiling limit of the employers' contribution to employees' PF and superannuation is 27 per cent. The contribution to PF is limited at 10 per cent and hence the maximum an employer can contribute to superannuation funds is 17 per cent.

Treating fringe benefit as a tax will amount to double taxation. Ms Shikha Sharma, Managing Director, ICICI Prudential Life Insurance, says, "There is still not much of clarity on the issue. This could potentially affect the business. FBT has been copied from the Australian model where superannuation was excluded. If it is included then EET becomes TET."

EET (exempt-exempt-tax) implies that there will be a tax only at withdrawal of the fund. TET implies that there will be tax at the point of investment and withdrawal — as in the case of superannuation. Under the group insurance scheme, ICICI Prudential has collected Rs 80 crore for April 2004 to January 2005.

Mr S. Muralidharan, Chief Marketing Officer, SBI Life Insurance, says, "This will completely kill corporate insurance. Companies might now give the provisioned money in cash which people are more likely to spend than save." Though SBI Life gets 70 per cent of its business from group insurance, they are careful to specify that only four per cent of their business comes from corporates.

"We won't be much affected by this move," says Mr Muralidharan.

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