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Focus on controlled expenditure
The Union Budget for 2011-12 will be presented in a situation where the “India Growth Story”, which seemed unstoppable only a few months back now under threat of moderation because of factors such as rising inflation, tight liquidity, slowing investments in both industrial and infrastructure sector as well as pronounced governance issues which has impaired investor sentiment to a significant extent. Ensuring that the growth momentum does not get derailed would be the critical priority for the Government. The top most focus area would be on fiscal consolidation, with a focus on both augmentation of tax revenues as well as control on expenditure.
However, given the Government's stated commitment towards ‘inclusive' growth and focus on issues such as food security, a credible programme of expenditure control would be a challenging task. This could be achieved only by ensuring that there is not a significant increase in outlay on new social sector schemes. The other area of controlling expenditure — tackling the issue of oil and fertiliser subsidies — also looks unlikely given the fact that a number of crucial State elections are round the corner. In this area, one can only hope for some measures to reform the Public Distribution System through conditional cash transfers or smart cards which could reduce the burden of subsidies.
The other big challenge is to remove the supply side bottlenecks that, along with the expansionary fiscal policy, has contributed to the high inflation rates. This could include encouraging investments in agriculture, besides investment in the supply chain as well as phased opening up of FDI in modern retail. On a sectoral basis, expectations from this Budget are quite muted. Given the imperatives of fiscal consolidation, one can expect an increase in service tax coverage, phasing out of exemptions and more roll back of the excise duty cuts that were introduced. However, the negative impact of such increased taxation could be more than offset, if the fiscal consolidation is able to achieve some extent of inflation control as well as reduce interest rates.
P.K. Choudhury
Vice-Chairman & Group CEO,
ICRA Ltd
Tax incentive for long-term savings
In the last year's Budget announcement, some significant changes were made to the taxation of insurance and saving instruments. The removal of service tax on all charges under Unit Linked Insurance Products except on FMC has benefited the policyholders. Also, the reduction in tax rate up to Rs 8 lakh ensures more money for the tax payer, which will promote savings. Whilst these initiatives were welcome it is not sufficient to stimulate growth in a sector that is of prime importance for the future economic well-being of the country.
We would recommend a separate limit for deductions under Section 80C for long-term saving instruments such as life insurance. Currently, the deduction under Section 80C also includes short-term saving instruments such as some mutual funds and fixed deposits. Life insurance and pensions are the only segments of financial services that address the needs of individuals in the long-term. Hence, the Government should look at encouraging people to save for long-term by providing a separate limit for long-term savings.
Carry forward of losses
Insurance business is a long-term gestation business. Currently, we are allowed to carry forward losses for only eight years. Most insurers do not make profit even in the tenth year. Hence, we recommend that the period for carry forward of losses is increased to 12 years.
Proposed EET treatment of long-term savings and investment product under the DTC- Section 10(10D).
Currently, the first two stages under the life insurance policies that is, investment and accretion are not completely tax-fee. At the time of investment, the tax benefit is available only up to the maximum limit of Rs 1 lakh and subject to the condition that the sum assured is at least five times of the annual premium. Further, accretion is taxed as life insurance companies are required to pay tax at 12.5 per cent on the surplus and service tax at 10 per cent is on all charges, including mortality charge and commission paid to the agents.
T.R. Ramachandran
CEO & MD, Aviva India.
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