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Monday, Feb 11, 2002

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Changes in tax regime for life insurers likely

Hema Ramakrishnan

NEW DELHI, Feb. 10

CHANGES in the taxation structure on the profits of the life insurance business are on the cards. The Finance Ministry is planning to incorporate some of the recommendations of the Eradi Committee on the taxation of the life insurance sector in the 2002-03 Union Budget, according to a senior Government official.

Currently, a 12.5 per cent tax is levied on the valuation surplus computed by an actuary appointed under the LIC Act.

The Eradi Committee, which submitted its report just a few weeks before the 2001-02 Budget, held that the valuation surplus method should be the basic method for determining taxable income for the life insurance business.

It, however, recommended that the policyholders' share of the surplus and the shareholders' profits (including the shareholders' share of surplus) should be separately assessed to tax.

The committee had further suggested that the shareholders' assessable income should be fully taxed on the applicable rate of tax and the policyholders' assessable income should be taxed at a comparatively lower rate.

Although the Eradi committee was constituted nearly two years ago to recommend the taxation structure in respect of profits of the life insurance business under the Income Tax Act, 1961 - keeping in view the entry of private players - there was considerable delay in the finalisation of the report.

This was mainly on account of the differences amongst members on a host of issues including the very methodology for determining taxable income in respect of life insurance business.

While the `valuation surplus' method was favoured by some members by virtue of it being a time-tested one, others were in favour of refining the investment income minus expenses (I-E) method which was in vogue along with the valuation surplus method till 1976-77.

In the run-up to the 2001-02 Union Budget, the Finance Ministry took the view that it would not be appropriate to rush through the implementation of the committee's proposals. The Government only introduced certain amendments in the Income-Tax Act 1961 to provide a level playing field to private insurers.

Private insurers have now entered into life and non-life businesses. Private insurers and their policyholders have now been provided the same tax incentives as available to the LIC and its policyholders. For instance, under Section 88, rebate is available on specified investments and on life insurance premia.

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