GIC Re, General Insurers Approach CBDT Seeking Relief From Long-term Capital Gains Tax

State owned re-insurer General Insurance Corporation of India, along with general insurers, have approached the Finance Ministry for relaxation of recent tax provisions that have impacted their profits due to a larger tax payout.

The issue is understood to have started with the withdrawal of the exemption under clause 38 of Section 10 of the Income Tax Act, 1961, and the introduction of Section 112A in the Union Budget 2018-19.

These insurers now have to pay a tax of nearly 33 per cent on sale of listed equities against the previous rate of 10 per cent to 15 per cent.

Higher tax outgo

“Apart from GIC, a number of non-life public sector insurance companies also have a big legacy base of equity investments,” said M Sashikala, Director and General Manager of GIC Re, adding that the re-insurer is now taking up the issue with the Central Board of Direct Taxes (CBDT).

GIC Re registered a near 20-per cent drop in net profit for the fourth quarter of 2018-19, partly due to provisions for Infrastructure Leasing and Financial Services (IL&FS) and partly due to a higher tax payout. According to Sashikala, it paid an additional ₹800 crore for tax in 2018-19 due to long-term capital gains tax.

With a view to “minimise economic distortions and curb erosion of tax base,” Budget 2018-19 had brought back long-term capital gains tax on profits on sale of listed equity shares of over ₹1 lakh, which are held for more than one year at a rate of about 10 per cent.

Previously, it was exempt from income tax under clause (38) of Section 10 of the Act.

Exemption

Another executive with an insurance company said the tax payout has increased substantially as the exemption is no longer available and all the profits from such long-term capital gains are taxed as business income.

“This is an issue for all general insurance companies. Earlier, they all used to claim exemption under Section 10 (38). Now, they are being taxed at 30 per cent (excluding cess and surcharge) on income from sale of securities. It will be a big hit,” said a tax expert.