Where Centre can boost insurance
A premium tax in place of service tax needed
The premium tax levy should be kept as low as possible in order to make insurance purchases affordable to the masses in semi-urban and rural areas.
THE UNION Finance Minister, while participating in the recent centenary celebrations of National Insurance Company at Kolkatta, bemoaned the poor penetration level of insurance in India, which now stands at 0.65 per cent.
Insurance penetration is measured as the ratio of gross insurance premiums collected to the gross domestic product and was 0.56 per cent in 2001.
He pointed out that in a country of 1.1 billion, the industry issued hardly six crore insurance policies. The Finance Minister wanted insurers to innovate products at affordable rates for the vast segment that was outside the insurance net.
More so, in the health segment where medical costs were outstripping the pace of incomes.
When compared with India, China has a penetration level of 1.06 per cent, up from 0.86 per cent in 2001, while the world average is 3.43 per cent against 3.15 per cent. The other metric for insurance penetration is the insurance density measured as the per capita gross premium collected.
On this count, India has a density of $4 against $13 for China and $220 for all countries.
The Finance Minister's keenness for a rapid rise in the penetration level is, therefore, understandable. Perhaps he believes that foreign direct investment is the right mantra for it.
Some of the areas wherein Government action can help boost insurance penetration levels are discussed here.
Service tax a deterrent
A major drag on the development of non-life insurance is the service tax of 12 per cent on policy premiums, making insurance purchases that much more expensive. The U.K. levies only a `premium tax' of 5 per cent and not a service tax or VAT.
An insurance policy is only a promise made to deliver service in case a contingent event occurs at a future date. It is at best a promise and does not amount to a delivered service for any tax to be levied at inception; as if the buyer has already received the promised service from the insurer.
As only about 50 lakh buyers out of six crore policyholders put in claims in a year, one can see how a large number pay the service tax without having to call for any service from insurers.
A service tax on insurance purchases is bad in its conception. It punishes buyers by adding to the cost of insurance.
An alternative for the Government, if it considers insurance purchasers an affluent section, is to levy a reasonable premium tax but exempt segments such as health insurance.
Otherwise, every time the service tax is raised, it will make insurance products more expensive and defeat the very objective of raising the penetration level.
Another irrational practice is to allow a deduction of premiums paid on health insurance purchases up to certain limits for income tax purposes. But the same buyers have to pay service tax.
Health insurance products have become very expensive for many, particularly senior citizens, who are not liable to pay income tax and hence cannot claim exemption for the premium paid.
Costly health cover
But they end up paying the service tax. This makes the purchase relatively more expensive for them than for those who claim tax refunds. The argument applies with greater force to the rural segment that by and large does not pay income tax but is the prime target of health insurance for the Government and political parties.
Thus, if the Finance Minister wants to raise the insurance penetration level in India, he should levy a premium tax and withdraw service tax on this segment.
Low rate desirable
The premium tax levy should be kept as low as possible in order to make insurance purchases, particularly of health insurance products, affordable to the masses in semi-urban and rural areas.
Any future hike in premium tax as a revenue raising measure will have to be deliberate and not incidental as at present insurance is now clubbed with many other service delivering sectors for service tax.
That is the plea of premium-paying consumers and not of insurers who are mere collectors of the indirect tax. Indian insurers have not yet felt the need to bring down premia through cost reduction or by seeking lower taxes.
The Finance Minister should help the rapid growth of the insurance sector which provides social and financial security for industries and individuals and lessen the burden on the Government in meeting social costs.
He can certainly do without the budgetary support of service tax from the non-life industry.
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