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Profits tax: LIC, new cos may be treated alike

Hema Ramakrishnan

NEW DELHI, Nov. 12

THE Finance Ministry is set to accord uniform tax treatment to profits made in the life insurance business by all players -- be it the new private sector entrants or the Life Insurance Corporation (LIC), hitherto the sole player.

Currently, a 12.5-per cent tax is levied on the valuation surplus computed by an actuary appointed under the LIC Act. While the Government is to come up with a new structure of taxation on profits of the life insurance business, the Revenue Department do es not expect any significant jump in revenues in the near term.

``Irrespective of the structure, the annual revenue mop-up may hover in the range of Rs 700-1,000 crore since it would take a while for these companies to start making profits,'' said officials.

According to available estimates, LIC has covered nearly 7.71 crore persons out of 27.7 crore of insurable population, which works out to around 28 per cent. The Life Fund of the Corporation topped Rs 1,50,000 crore up to March 31 2000, growing by nearly 20 per cent over the previous year.

Of the seven private companies that have applied for registration with the IRDA to enter into life business, only one -- HDFC Standard Life Insurance -- has been given a licence so far.

Officials reckon that life business offers a huge potential, given that 70 per cent of insurable population is still untapped.

They, however, point out that it does not make sense to accord differential tax treatment to public and private sector players.

Modifications in the existing structure of taxation will be based on the recommendations of the expert committee appointed for the purpose.

The committee, chaired by Mr V.U. Eradi, is expected to submit its report before the month-end. Since the Ministry would require some time to scrutinise the recommendations, the requisite amendments to the Income-Tax Act may be made in the Finance Bill f or 2001.

Although the `valuation surplus' method appears to be the most favourable and time-tested system, sources said that the committee has not foreclosed other methods of taxing profits generated from life insurance business. Among the alternatives are taxati on of a certain percentage of premium income.

The panel is also looking at the option of a refinement in the investment income minus expenses method (I-E) which was in vogue along with the valuation surplus method until 1976-77. The I-E method was dispensed with, as it was prone to litigation. Besid es, due to inherent inefficiencies in the sector, I-E was seldom positive.

Subsequently, profits of life insurance business were taxed on the basis of valuation surplus method since the assessment year 1977-78.

Reports indicate that the 11-member committee may even consider recommending continuation of the present system, albeit with some modifications in the rate.