Its Union Budget time! What do people do the next morning following the budget – they possibly glance through the budget analysis doled out by many advisory firms and eye-ballthe major highlights of the budget. Nothing more. Gone are the days when people used to make a rush for the newspapers to see what’s going to cost more and what’s become cheaper from an everyday use point of view.
This is largely attributable to a strong framework of indirect taxes in the form of GST, which can be amended only through the federal structure of the GST Council comprising finance ministers of all states. The budget for the ordinary people seems to have almost disappeared!
But why is then Budget 2021 so important? Because it’s the first one after a once-in-a-century event (the pandemic) and also its only the fourth one in 74 years of independent India following a sluggish economy and yes, also the first one of this decade.
Overall, Budget 2021 has a significant thrust on investment, infrastructure and healthcare spending rather than stimulating consumption gradually. But what does Budget 2021 mean for the ordinary Indian? Experts had predicted an additional COVID cess to level the government's revenue loss. The salaried class was hoping for a tax cut. In the end, the government did neither. This was never meant to be a populist budget. It is a practical budget. The finance minister’s speech was one of the shortest in Indian history so far– the main reason being the brief section on taxation, though, in jest, I like to think this was actually the result of the feedback which she received on her budget speech in 2020 (which was the longest in Indian history!). This government has shown all indication of focusing on improving tax compliance rather than tinkering around with the policies and the rates. I would give that a thumbs-up.
Now for the specifics on insurance. Foreign direct investment (FDI) in insurance has been hiked to 74% from the current 49% with sufficient governance and management safeguards. FDI in insurance broking is already at 100%. This move is bound to help build capacity within India, strengthen the sector and also help penetration of insurance, which still is way behind the world average. It has the paved way for many foreign insurers who were unsure of whether or not to enter Indian markets earlier because of the 49% rule. From the consumer perspective, this works well too – there would be more innovative products to choose from. For the intermediaries too, this move adds to their product basket - as more the number of products that are available in the market, more would be the need for specific advice as regards the same. Intermediaries with innovative distribution models and a customer-focused approach would thrive.
On the individual front, there is no tax exemption for maturity proceeds of unit-linked insurance policies (ULIPs) issued on or after February 1, 2021,with an annual premium above INR 2.5 lakh. However, amounts received under such ULIP policies on death of the policyholder will remain exempt from tax. Possibly, this could lead to a dent in the sale of ULIPs, a product which I personally do not fancy much!This also drives home the point that insurance must be viewed from a risk protection perspective and not from an investment return or tax savings perspective.
The Budget speech also clarified that Life Insurance Corporation of India (LIC) will go for an initial public offering (IPO) in 2021-22. This is likely to be a mega event ending up with LIC becoming the ‘big daddy’ in market capitalisation. One of the general insurance companies is also going to be on the privatisation block. The name is not yet disclosed. But both these events are likely to release a significant amount of resources to meet the ambitious investment, infrastructure and healthcare spending envisaged in the budget.
Saurabh V Dharadhar
Chief Financial Officer and Ethics Officer
Mahindra Insurance Brokers Limited
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