Big boost to insurance, GST reforms

New Delhi: Two long-pending key economic reforms, the single goods and services tax (GST) and permitting 49% composite foreign equity investment in insurance companies, got a big boost on Wednesday.

The select committee of the Rajya Sabha overruled dissent from four members and gave its approval to the amended insurance legislation. The cabinet, later in the day, approved the Insurance Amendment Bill, incorporating the amendments suggested by the panel, for presenting the draft legislation in Parliament.

Later, addressing the debate on the supplementary budget demands, finance minister Arun Jaitley took a big step to bridge the trust deficit with states on GST by committing to pay out this financial year Rs.11,000 crore in part settlement of the central sales tax (CST) compensation dues. The announcement is even more significant because it comes a day ahead of his meeting with state finance ministers.

The passage of insurance reforms will improve sentiment among foreign investors, especially because it has become a litmus test of the ability of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) to steer legislation through the Rajya Sabha where it is in a minority.

The introduction of GST, which will create a unified market, will usher in greater transparency and accountability, besides making it easier to do business.

On Wednesday, minister of state for finance Jayant Sinha said in a written reply in Parliament that a broad agreement has been achieved with the states on most of the issues concerning the implementation of GST, which is scheduled to be rolled out from 1 April 2016.

The announcement of a compensation package for the states comes a day before Jaitley’s meeting with state finance ministers to discuss pending issues such as inclusion of petroleum and liquor in the GST basket. Ahead of meeting Jaitley, the empowered committee of state finance ministers is scheduled to discuss the draft Constitution Amendment Bill for the implementation of GST in their meeting on Thursday.

“Despite a difficult and challenging situation, I propose to release about Rs.11,000 crore this year as a part payment of CST compensation to the states. This will take care of the amount from 2010-11 onwards. The balance amount I will start paying from the next financial year,” Jaitley said while replying to the discussion on the supplementary demands for grants introduced in Parliament.

The Rs.11,000 crore is roughly one-third of the dues.

Jaitley indicated that he would bring another supplementary demand for grants in the current fiscal, which will take care of the promised CST compensation.

Vivek Mishra, leader, indirect tax, PricewaterhouseCoopers India, said the CST compensation payout cannot be staggered. “I have my doubts that this limited compensation will help convince states to accept the GST Constitutional Amendment Bill. States have very limited amount of power and once they vote for the Bill, they fear being taken for granted. While they gain only in one area of getting to tax services, they lose revenues in some four or five areas, and there is no guarantee that GST will give them more revenues even after three or four years. So, one needs to understand the difficult situation in which states have to take a decision.

GST will subsume indirect taxes such as excise duty and service tax at the central level and value-added tax and local levies at the states level.

The GST Constitutional Amendment Bill, which was introduced in the Lok Sabha in 2011, has lapsed and the NDA government will need to move a fresh Bill. States have been demanding that petroleum, alcohol and tobacco be kept out of the purview of GST. The GST rollout has missed several deadlines because of lack of consensus among states over certain crucial issues on the proposed new tax regime.

The finance minister reiterated to Parliament that the Indian economy is expected to grow in the range between 5.4% and 5.9% in the current financial year and the country might as well achieve the 6% mark during 2014-15.

“I think we will be comfortable within that range. Next year hopefully it will top the 6% hump; some people are predicting 6.5%,” Jaitley said.

Yet, he added, the “challenges” cannot be underestimated. The Union government has vowed to maintain the fiscal deficit at 4.1% of gross domestic product (GDP) in 2014-15 so as to reassure investors and rating agencies around the world of India’s financial soundness.

Insurance approval

The insurance Bill obtained the nod of the select committee after the government succeeded in enlisting the support of the Congress.

While the Congress was initially reluctant to make the 49% foreign equity cap a composite one, including both foreign direct investment and foreign portfolio investment, it reversed its view later.

“The committee recommends that the composite cap of 49% should be inclusive of all forms of foreign direct investment and foreign portfolio investments,” the select committee said in its report, a copy of which has been reviewed by Mint.

The Bill is likely to be presented before Parliament next week.

Interestingly, out of the 15-member select committee, only four members, K.C. Tyagi of the Janata Dal (United), Ram Gopal Yadav of the Samajwadi Party, P. Rajeev of the Communist Party of India (Marxist) and Derek O’Brien of the Trinamool Congress, submitted dissent notes against the decision to raise foreign direct investment (FDI) in insurance sector from 26% to 49%. The committee had two vacant posts after BJP members Mukhtar Abbas Naqvi and J.P. Nadda were inducted in the council of ministers.

Apart from the Congress party, the Mayawati-led Bahujan Samaj Party, the All India Anna Dravida Munnetra Kazhagam and the Biju Janata Dal also supported the recommendations allowing the government to move forward and present the amendments in the Insurance Laws (Amendment) Bill next week.

The move is a major victory for the Narendra Modi government as it lacks a majority in the Rajya Sabha.

The NDA has only 57 members in the Upper House of Parliament. The Congress has 68.

However, the select committee rejected the government’s proposition in its proposed Bill to reduce minimum paid-up equity capital needed for exclusive health insurance business to Rs.50 crore from Rs.100 crore at present. “The committee was unanimous that a reduction in the paid-up equity capital in health insurance sector as compared to the life and general insurance would encourage non-serious players to enter the field. The committee therefore strongly recommends that capital requirements to ensure health insurers of adequate capacity to provide these critical services to all citizens of the country may be retained at the level of Rs.100 crore and health insurance be given the utmost priority,” the select committee said.

The committee suggested that the Insurance Regulatory and Development Authority (Irda) in consultation with the Medical Council of India should formulate regulations to ensure that malpractices in the health insurance sector such as unnecessary investigations, procedures and hospitalisation could be avoided to create a healthy vibrant health insurance sector.

The select committee also has recommended repeal of another clause in the Bill to prohibit insurers from earning reinsurance commission, agreeing with Irda’s contention on the issue. “The committee is of the opinion that there is merit in the argument cited by Irda that prohibiting insurers from earning reinsurance commission would be an impediment in the growth of the reinsurance industry,” it added.

K.S. Gopalakrishnan, managing director and chief executive officer at Aegon Religare Life Insurance Co. Ltd, said the 49% composite cap is a good step for the industry as it gives flexibility to raise capital in different forms.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.