The Insurance Regulatory and Development Authority (IRDA) is in favour of raising the foreign equity cap in the Indian insurance sector from existing 26%, if the Indian promoters fail to enhance the capital base required to sustain the high growth of the sector.

“We feel that as the business grows, the capital base has to be increased. If the Indian players don’t bring additional funds, the government has to raise the foreign equity cap,” IRDA chairman CS Rao told newspersons. Maintaining that the Indian insurance industry already has the presence of all major foreign players, he said “The IRDA will favour increasing the equity cap for foreign insurance companies to enhance the capital base.”

The total foreign direct investment in the insurance sector currently stood at US $ 180.5 million, while the total paid-up equity of the industry was UD $ 870.2 million. The industry had registered a combined growth rate (for life and non-life segments) of 25% over the last two years.

The uncertainity surrounding the tax incidence in the hands of foreign companies, which have set up captive business processing centres in India, is likely to be done away with soon. This follows the Vijay Mathur-led committee’s recent suggestions to the Central Board of Direct Taxes that no profit can be attributed in India in the hands of the foreign company, provided the transaction with its wholly owned subsidiary is at an arm’s length. In such cases, the foreign parent cannot be taxed in India.

In the case of an independent Indian company providing BPO services to the foreign company, the committee had no hesitation in reaching the conclusion that no profits could be attributable in the hands of the foreign company.

The treaty laws provide that a dependent agent constitutes a permanent establishment in India of the foreign company. Profits attributable to such a permanent establishment are subject to tax in India. An amendment in Indian tax laws also covered “ agency relationships” within the ambit of the term, “business connection”. The fear among foreign companies and professionals was that a captive BPO provider could be treated as dependent agent, and the foreign parent could be subject to litigation in India over tax demands raised on it.

However since specific transfer pricing regulations are already in place, these should be adhered to. Hence, in a captive BPO scenario if the transaction between the parent and its captive is at arm’s length, then the foreign parent cannot be subject to tax, even if the captive’s business is seen as an extension of the parent’s business

In the coming years, transfer pricing studies that prove an arm’s length dealing between the foreign parent and its captive service provider will help ensure that the foreign parent is not subject to unjustified tax in India. Tax officials say if the views of the committee are accepted, transfer pricing will assume even greater importance.