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Foreign Reinsurance Companies Remain Buoyant About Unequivocal Tax Rules
Though the road has been paved on the regulatory front, there is still a need for clarity and simplification in taxation rules that are applicable to these branches
A number of foreign reinsurance companies zealous of having direct physical presence in India are on the verge of opening their branches in the country. This development comes as a result of the passage of Insurance Laws (Amendment) Bill, 2015 and the Insurance Regulatory and Development Authority of India (IRDAI) guidelines that prescribe the operational framework needed for setting-up of reinsurance branches.
Though the road has been paved on the regulatory front, there is still a need for clarity and simplification in taxation rules that are applicable to these branches.
At present, the Indian income tax law prescribes a specific taxation rule for branches of non-resident insurance companies, which requires taxable income in absence of reliable data to be computed by applying a formula, viz. World income x India sourced premium/Global premium income. However, it is not explicitly clear as to what exactly constitutes reliable data, as well as the taxation mechanism in case the same is available.
Perhaps, lack of clarity in tax rule may be owing to the fact that the income tax law has not kept pace with the recent amendment in insurance laws. Ambiguity in the taxation regime could result in protracted litigation which neither helps the government nor the industry.
Apart from the mechanism of taxation, another area of concern is applicability of Minimum Alternate Tax (MAT) to reinsurance branches. One may note that the intention behind introducing MAT was to levy minimum tax on profitable domestic companies that were not paying taxes due to tax exemptions and incentives. In this regard, the insurance/reinsurance business has some peculiar features. For instance, reinsurance branches are mandated to prepare accounts as per the guidelines prescribed by the regulator, which inter alia requires few liabilities to be valued on the basis of actuarial valuation (based on certain assumptions). Hence, one can argue that what is accounted for in the books may not always be ascertained liability.
Given that MAT provisions mandate adding back of all unascertained liabilities, a number of provisions could be required for the same to be added back in MAT computation in case of reinsurance branches. Considering these peculiar features, reinsurance branches should be exempt from MAT provisions, just as Indian life insurance companies are.
Since reinsurance branches are treated as non-resident entities for Indian tax purposes, one more area that may affect these branches is the applicability of withholding taxes on payments received by them. In the absence of lower/nil withholding tax certificate, all payments received by reinsurance branches would be subject to withholding at 40 per cent (plus applicable surcharge and education cess). This, apart from creating huge cash flow issues, could not only render business unviable, but also enhance administrative burden of claiming tax refund for reinsurance branches. A similar respite as provided to foreign bank branches in India (i.e. specific mechanism to apply for nil withholding tax certificate) may be introduced to overcome this issue.
On a related note, it may be noticed that despite the fact that life insurance companies in India are subject to a special tax regime, these companies are involved in long drawn litigation on various issues with the tax authorities. The law makers must take a clue from this and provide a simple and transparent taxation regime for reinsurance branches right from inception.
As the size of the Indian economy grows, so do the associated risks. There is also a likelihood that such risks can transgress to other countries, aided by reinsurance. Given this, the importance of a vibrant reinsurance sector for an economy like India cannot be understated. The presence of a strong foreign reinsurance market in India could help in protecting the country's capital in case of catastrophic events, and may also benefit the economy as a whole.
Thus, a specific taxation regime, post consultation with stakeholders, could not only assist in rationalising and simplifying the tax rules, but may also help in reducing litigations and promoting a conducive environment for business and growth. We remain hopeful that the upcoming Union Budget can help provide a simple taxation framework, exemption from applicability of MAT provisions, and respite from application of withholding taxes, while also showcasing the government's commitment towards ease of doing business in India.
(The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG in India)
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.