HEALTH insurance premiums could soar if the forthcoming Budget does not clarify on the issue of tax deduction at source for non-life insurance companies. Insurance companies are in a tizzy after the revenue-hungry income tax department asked for tax deduction at source to be imposed on most of the insurance transactions. This included payments made by insurers to foreign reinsurance companies and also payments made on behalf of insurance companies to hospitals in settlement of 'cashless' claims. According to insurers, since neither hospitals or reinsurance companies will bear the tax burden, the tax will have to be passed on to the policyholder, er premium. "We are hoping that the Budget will correct these anomalies" said SL Mohan, chief executive of General Insurance Council - the association of life insurance companies.

Unlike life, there are several transactions against the same underlying insurance policy in non-life. For instance, when the policy is issued and the premium collected, there is also a commission paid to an agent. The policy is then reinsured (either standalone or as part of the portfolio) and there is a reinsurance commission as well as reinsurance premium paid out. The reinsurer in term pays commission to the domestic insurer for procuring the business. When it comes to claims too, there are several transactions like payment to third-party administrators, who in turn pay to service providers. The I-T department has sought to impose TDS on all these transactions. "On the health insurance side, we look forward to payments by TPAs and insurers to hospitals to be exempted from TDS," said S Sreenivasan, CFO of Bajaj Allianz General Insurance.

"Foreign reinsurers generally do not have any permanent establishment in India and hence, do not attract the provisions of Section 9 of the Income-Tax Act (income deemed to accrue or arise in India). Reinsurance is a globally-driven market and withholding of tax is not a normal practice anywhere in the world. The UN Model Convention on taxation specifically exempts reinsurance from deeming accrual of income, notwithstanding the fact that the premium or risk may pertain to the territory of any particular country," said Ajay Bimbhet, MD of Royal Sundaram Alliance General Insurance. According to Mr Mohan, the industry has also asked for rescinding last year's Budget proposal that introduced a tax on unrealised gains from investments of non-life companies.

"We have also asked for tax breaks on household insurance up to a premium of Rs 2,000. After tax breaks were increased for health insurance, there was a spike in sales. If there is a similar increase in penetration of household insurance, it will ensure that citizens are protected if there is a natural or man-made calamity," said Mr Mohan. "Additional I-T exemption for householder's policies and concessional IT rates would undoubtedly give a fillip to personal insurance and reduce the burden on the government in the event of catastrophes (CAT events)," said Mr Bimbhet.