Finance Minister Nirmala Sitharaman, in her maiden budget speech last year, made a couple of policy announcements with regard to the insurance sector. They include permission for 100 percent FDI in insurance intermediaries such as brokers, corporate agents and third-party administrators, and the government’s intent to enhance FDI limit in the insurance companies.
In October 2019, the Insurance Regulatory and Development of Authority of India (Irdai) amended the relevant insurance intermediaries’ regulations to permit 100 percent FDI in insurance intermediaries such as brokers, corporate agents, third party administrators. The 100 percent FDI is permitted in insurance intermediaries subject to stipulated riders. Amongst others, such riders include that the majority of the board of directors/key management persons should be resident Indian citizens and prior Irdai approval shall be obtained for repatriating dividend.
The increase in FDI in insurance companies is under consultation with relevant stakeholders. FDI in insurance companies is currently permitted up to 49 percent with a rider that insurance companies should be Indian owned and controlled, i.e. more than 50 percent shall be beneficially owned by resident Indian citizens and control of the insurance company shall be in the hands of resident Indian citizens.
The insurance industry expects that FDI in insurance companies would be permitted up to 74 percent with a dilution of the requirement of ‘Indian controlled’. It remains to be seen whether the government would accept the demand of the insurance industry.
The insurance sector plays a pivotal role in the economic development of the country. It is well recognised that penetration of insurance, both life and non-life, in India is extremely low compared to other countries. Enhancing FDI limits in the insurance sector should help the country in bringing better technical know-how, innovation and improving insurance penetration. The insurance business is capital intensive and insurance companies are expected to have deep pockets. Given the long gestation period, not many Indian partners are keen on infusing more money. This coupled with the fact that insurance companies are in need of capital, enhanced FDI should augur well for the insurance sector as well as the country.
Moreover, enhancing FDI limits should help insurance companies expand the business, thereby generating more employment.
Pertinently, when buying insurance, policyholders are known to be cautious of the background of the promoters of insurance companies. Accordingly, the policyholders would expect the Irdai to keep robust checks and balances in place vis-à-vis enhanced FDI in insurance companies. The government and Irdai will have to strike the right balance between securing the interest of the policyholders and liberalising the FDI norms.
Tax reforms needed
Whilst over the past three to four years, the Irdai has licensed nine foreign reinsurers to set up branch offices in India, the need of the hour is to provide a simple, transparent and stable taxation framework.
Being non-residents, a significant issue that is bothering foreign reinsurance branches is the levy of withholding taxes on gross payments at a maximum rate (i.e. 43.68 percent) unless such reinsurance branches apply and obtain a specific lower withholding tax certificate from the revenue authorities. The current process of obtaining a lower withholding tax certificate is fraught with a few challenges which are impacting the cash flows and thereby business operations of reinsurance branches. It will greatly help if the facility is also given to reinsurance branches to obtain a blanket NIL withholding tax certificate on similar lines as issued to the Indian branches of foreign banks. Also, a special code of taxation, that is fair and unambiguous, should be introduced for foreign reinsurance branches.
Besides foreign reinsurance branches, life insurance companies are grappling with several tax issues.
The insurance/reinsurance industry would eagerly welcome the tax reforms to resolve the above issues in the upcoming Budget 2020 as this will go a long way in achieving the government’s aim of enabling ease of doing business in India.
- with inputs from Bharat Jain, Chartered Accountant
(A version of this article appeared in CNBCTV18 on January 22, 2020)