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Insurance

General COVID Impact on the financial services industry

Indian insurance industry has not been able to insulate itself from the growth pressures faced by Indian economy in general. During the pandemic, the risk management practices that were adopted by the companies have been put to acid test currently.

COVID 19 global pandemic was a double blow for the Indian economy which was already struggling. According to the World Bank, the current pandemic has “magnified pre-existing risks to India’s economic outlook”.

What began as a health crisis, quickly unfolded into a business crisis. There is hardly any business sector that has been left untouched by the novel coronavirus COVID-19. outbreak. Aviation, Tourism, Manufacturing, Transportation, the banking, financial service and insurance (BFSI) and Retail industries top the list.

In March, India imposed a nationwide lockdown with the hope to contain the outbreak. The Indian lockdown which lasted for nearly three months, was supposedly the most stringent lockdowns the world has seen.

To steer the country through these unprecedented times, the Indian central bank – Reserve Bank of India and the Indian government have implemented several measures – fiscal, legislative, and operational. The Government of India began a series of initiatives – all non-essential services in the country were halted (insurance was classified as essential), an aid package of more than USD 260 billion was dispensed to create a self-reliant India and several labour law initiatives were undertaken. The healthcare space also witnessed a drastic shift with the opening-up of the telemedicine sector in India and remote treatments being made accessible.

In April 2020, India also changed in foreign investment policy to curb “‘opportunistic takeovers/acquisitions’ of Indian companies due to the current pandemic”. The revised policy ensures that all foreign investments from countries that share a land border with India will now be under scrutiny of the Indian Ministry of Commerce and Industry.

Challenges faced by the insurance industry

The COVID-19 crisis raised short term and long tail challenges equally for the insurance industry. Insurance companies were facing operational and procedural challenges, revenue dips and depleting reserves as well as the mandate to meet the growing coverage requirements faced by the entire country.

Insurance players had to attend to concerns such as:

  • Business continuity: Risks on an insurance companies own existence was required to be planned for and several stress-test mechanisms were kickstarted.
  • Employee well-being: While the insurance industry is moving towards digitisation, it is and will always be employee centric. With the government classifying insurance as an essential service, employers were required to strike a balance between work-from home procedures and the requirement of face-to-face interactions with customers. This also presented an increased exposure to the virus.
  • Crisis management: Insurance companies are expected and required to monitor the evolving situation of the pandemic and initiate all measures necessary to effectively communicate and manage employees and customers. Moreover, an insurance company is required to maintain effective and frequent communication with regulator, customers, partners, agents, brokers, shareholders, etc. to build confidence and ensure continuity of service.
  • Capital adequacy: Indian insurance companies are required to maintain a prescribed regulatory solvency and ensure financial resilience. While unprecedented exposures are accounted for to an extent, the pandemic had the potential of sending balance sheets into a tailspin.
  • IT infrastructure and cyber security: With the gear increasing on remote access requirements, a tall order of building an appropriate IT infrastructure was asked for in a very short span of time. There was a heightened risk of cyber incidents and insurance companies were inevitably vulnerable and easy targets.
Regulatory challenges and initiatives

The Indian insurance regulator – Insurance Regulatory & Development Authority of India (IRDAI) has continually released several instructions and clarifications that steered the course of insurance responses to the pandemic.

  • Insurers were instructed to accept COVID-19 related claims under active health insurance policies even though underwriting and actuarial procedures did not account for such increased exposures.
  • IRDAI advised insurance companies to extend the grace or delay period by 30 days in case of policy lapse or renewal.
  • Specialised short term COVID health insurance products were launched with fixed benefits
  • A standardised product COVID product was also launched to provide protection to a large number of employees engaged in manufacturing, services, SME, MSME, logistics sector and migrant workers, catering to their medical needs.
  • Several regulatory compliances were relaxed or timelines were extended by IRDAI
COVID Impact on health insurance

The pandemic has driven the realisation of needing protective investments – specially health and life. There has been a promising uptake of 30-40% in health insurance adoption. The tipping scale has moved from health insurance being a ‘push’ product to a ‘pull’ product.

In the wake of the COVID crisis the health insurance industry has seen tectonic shifts and has become the collective priority of businesses, the government, and people. The demand for health insurance has increased but underwriting thresholds have also seen a rise. India has been an under-insured country even though the mass insurance scheme – Ayushman Bharat launched for the poor, seemed to have bridged the gap significantly.

While in the short term, insurers have responded to the call for adequate coverage, concerns are rising on the long term and indirect effects of the pandemic. Experts have analysed that COVID-19 interacts adversely with co-morbidities such as diabetes, renal and other chronic diseases and any impact may prolong conditions resulting in a longer trail of non-COVID-19 claims also.

Further, typical insurance policies and specifically the Ayushman Bharat scheme does not cover the impact of setting up isolation wards which would increase underwriting assumptions and cost calculations significantly.

On the other hand, newer products are developing and insurers may switch to developing specific products rather than standard wordings, while retaining the need for simplified policies.

COVID Impact on different lines of business
  • Life insurance: The crisis is expected to result in customers rushing to increase covers. The market would see a reactive boost in demand in term insurance. Investment-linked products may not see major demand due to a volatile stock market.
  • Motor insurance: The automobile space would see a lack of purchase of new vehicles and fewer vehicles in transit thereby reducing the chances of accidents resulting in a decline in new policies and reduced claims on existing policies. However, a dichotomy exists as social distancing is expected to persist for a long period of time causing a surge in private vehicles – two-wheeler and low cost four wheelers, thereby increasing the need for insurance. A shift anchored by COVID-19 can be seen in new usage-based motor insurance policies that were launched recently which allows owners to insure vehicles for the kilometres they intend to drive.
  • Property insurance: Large impact on property insurance is seen with the trigger of the 30 day no-occupancy exclusions of property damage insurance policies. This clause is likely to bring in a large chunk of disputes.
  • Professional Indemnity: While work is being carried out at home, there seems to be an increase in potential vulnerabilities that organisations face. The management is making decisions in the teeth of daily changing government policy. Actual or alleged breach of duty, negligent act, error, omission, misstatement, misleading statement, breach of warranty or breach of confidentiality, all are actions and/ or inactions that may trigger a claim against an organisation.
  • Business interruption insurance: BI losses has been a major area of discussion during this time of the pandemic. In Indian policies, property damage triggers business interruption losses and advanced loss of profits, hence triggering disputes and debates over BI losses caused even without physical damage to property. In India, the market is not tested as the judicial functions were largely suspended.
  • Directors and Officers liability insurance: In the wake of crisis, the Directors and officers may face a litigation from the employees as employees may contract COVID 19 while travelling to work or while working in the office premises. Further, there may be an increase in security class action suits where typically allegations would include, (a) failure to disclose or adequately disclose risks that company faced – or failure of the company to update prior disclosures as circumstances evolved; (b) inadequate steps to mitigate risks; (c) failure to observe recommended or required protocols; or (d) failure to develop adequate contingency plans. Also, though many existing D&O policies may not be written with cyber and technology related risks in mind, the failure to protect against and insure for privacy or cyber liabilities could potentially lead to D&O liability.
  • Cyber insurance: A major boost is seen and is further expected in cyber insurance due to a reliance on remote access and increasing risks and vulnerabilities.
Digitisation

The insurance industry has witnessed a massive shift towards digitalisation. The global financial crisis in 2008 propelled the redesigning of payment systems and processes and now COVID-19 has forced the insurance industry to adopt remote and digital ways of working and it is undoubtedly set to drive a wider acceleration of technology adoption across the industry. This is a trend, of course, that has already been with us for some years: but the current situation will significantly expedite it

Insurers have undergone digital transformation at the product level or specific elements in the supply chain but now will be urged to reprioritise technology spend into insurtech, digital distribution and technological infrastructure.

What we at Khaitan Legal Associates think?

Government and IRDAI did some quick thinking and responded to COVID 19. Even the insurance industry rose to the challenge and aligned itself with the larger objective of the Government and IRDAI in alleviating the impact of the pandemic and its fallout on the policyholders.  Unlike several other jurisdictions, where the insurance/financials services regulator became eager to intervene in existing insurance covers, especially in the area of business interruption, the IRDAI thankfully exercised restraint in India. However, now when the worst seems to be behind us, the Government and IRDAI should get back to rebuilding the insurance story. The India growth story will be incomplete without a robust insurance sector, so the focus should be back on reinvigorating the insurance sector. Some work has commenced but a lot more needs to be done.

Footnote :

Circular Ref. No.IRDAI/HLT/REG/CIR/054/03/2020 IRDAI press release dated 23-03-2020

Categories
Corporate & Commercial

India’s final amended tax residency rules for Citizens and Indian origin individuals based overseas

This note is in continuation to our earlier note of February 2020 which discussed the proposals of the Finance Bill, 2020 (‘the Bill’) to amend the tax residency conditions for non-resident Indians and persons of Indian origin1 with effect from 1 April 2020 (i.e. Financial Year 2020-21 onwards2).

In substance, the proposals aimed to reduce the flexibility of stay currently given to such individuals in the determination of their tax residency status and bring within the tax net Indian citizens that are not tax resident in any country. If such a person was to become an ordinary resident under the proposed amendments, not only would such person be liable to tax in India on global income but also be required to report all foreign assets in the tax return. The nature of the proposals brought into the focus the potential importance of the ‘tie-break’ rule under a tax treaty of India with the country of such person’s residence. The note is attached once again for your easy reference.

Subsequent to the introduction of the Bill, concerns were raised by various stakeholders that the language of the proposed amendments could negatively impact cases of such persons genuinely employed / working / living outside India. To address this, the Government of India issued a press release stating that income earned outside India by such Indian citizens who are bona-fide based outside India shall not be taxed in India unless it is derived from an Indian business or profession.

Given this background, suitable modifications were expected to be made to the proposed amendments at the time of passing of the Bill. As expected, at the time of enacting the Finance Act, 2020 (‘the Act’), the following modifications have been made:

Nature of person Original proposal as per the Bill Enacted provision of the Act
An Indian citizen or a Person of Indian origin (PIO) based outside India and visiting India Would be considered as an Indian resident if:

  • stay in India was for 120 days or more in that financial year; and
  • aggregate stay in India in the preceding 4 years was 365 days or more.
Would be considered as an Indian resident if:

  • stay in India was for 120 days or more in that financial year;
  • total income (excluding income from foreign source3) exceeds INR 1.5mn in the given financial year; and
  • aggregate stay in India in the preceding 4 years was 365 days or more.
    Accordingly, only persons exceeding the above mentioned income threshold would now be subject to the lower threshold of stay of 120 days. For others, the existing threshold of stay of 182 days continues to apply.
An Indian citizen who is not liable to tax in any other country or territory Deemed to be a resident in India, irrespective of his period of stay in India in the said financial year. Deemed to be a resident only if the total income of such citizen (excluding income from foreign source3) exceeds INR 1.5mn.
Nature of person Original proposal as per the Bill Enacted provision of the Act
by reason of his domicile or residence or any other criteria of similar nature (i.e. Stateless Indian Citizen)    
Individual treated as “not ordinarily resident” (NOR) Will be treated as NOR if such individual is non-resident in India in 7 out of the 10 preceding financial years.
In other words, an individual will be treated as ordinary resident only if considered resident in 4 out of 10 preceding years.
The proposed amendment has been dropped. Accordingly, the existing conditions of NOR will continue i.e. for being a NOR such person should be:

  • non-resident in 9 out of 10 preceding years or
  • stay in India should be of 729 days or less during the preceding 7 years.

However, the definition of NOR has now been expanded to include:

  • Individual considered as Indian resident due to the amended new threshold of 120 days, provided stay in India is less than 182 days;
  • A stateless Indian citizen considered as Indian resident due to the above amended new provisions.

The amendments enacted by the Act seeks to address the concerns raised by stakeholders. However, while the threshold of INR 1.5mn for non foreign source income should reduce the applicability of the amendments to many such persons (herein after referred to as “NRIs”4 for sake of brevity), NRIs with high net-worth (HN) may need to further analyse the applicability of these provisions as they are likely to have Indian sourced income exceeding INR 1.5mn annually.

HN NRIs falling in the category of stateless Indian Citizens may consider arguing that while their countries of residence do not actually levy tax, they continue to remain liable to tax in those countries as and when the need arises. This argument should be backed by a tax residency certificate (TRC) issued by the authorities of such NRI’s country of residence. Other HN NRIs who may get covered by the lower threshold of 120 days of stay in India need to carefully monitor the days of stay in India. The use of ‘tie break’ test under an applicable Indian tax treaty should also enable both sets of NRIs to argue that they ultimately are non-residents in India. To access the tax treaty, TRC would be a must. The features of the tie-break rule were already discussed in our earlier note.

Having said the above, one of the key takeaways from the amendments made by the Act are that even if such NRIs are treated or deemed ‘resident’ in India, they will be categorised as NOR only. The following table explains the difference arising from the categorisation of residency of such NRIs:

Resident NOR Non-resident
Liable to tax in India on global income Liable to tax in India only on India-sourced income and income which arises from a business or profession controlled or setup in India Liable to tax in India only on India-sourced income
Required to disclose all foreign assets in Indian tax return Not required to disclose all foreign assets in Indian tax return Not required to disclose all foreign assets in Indian tax return

From the table, it can be observed that NOR NRIs will not be liable to tax on their global income in India. Further, they will not be required to disclose foreign assets in their Indian tax returns.

In essence, the only difference between a NOR and a non-resident NRI will be that in addition to India-sourced income, a NOR will be liable to also pay tax in India on income which arises from a business or profession controlled or setup in India. Practically, such income would most likely already be covered in the definition of India-sourced income and hence, no material impact may arise.

Nevertheless, the term “income derived from a business controlled in or a profession set up in India” is now of two-fold significance i.e.

  • for determine scope of total taxable income; and
  • determining the threshold of INR 1.5mn for the new stricter residency rules.

Accordingly, it is hoped that tax authorities provide suitable clarifications on the meaning of this term to enable concerned NRIs to understand the exact scope and nature of income to be considered while computing the threshold of INR 1.5mn. This should provide greater certainty to NRIs and significantly reduce the possibility of litigation with tax authorities.

On a parting note, it may be mentioned that if the case of any such NRI does get selected for scrutiny by the Indian tax authorities (which is routine in India), an intense and invasive scrutiny of such NRI’s personal matters cannot be ruled out. For instance, the tax authorities may:

  • undertake verification of the passport to determine number of days of stay in India,
  • understand and verify the nature of activities in India and overseas,
  • ask for details of total wealth, businesses, income etc. and their bifurcation between India and overseas5,
  • ask for composition of family, their location, businesses, etc.

Further, if the NRI is relying on a tie-break rule, possibility of litigation with Indian tax authorities on account of any contrary interpretation also cannot be ruled out.

In conclusion, HN NRIs need to carefully assess their residential status in India from 1 April 2020 onwards and analyse the impact on their liability towards Indian taxes arising from the amendments enacted by the Act.

For any further information, please feel free to reach out to Sakate Khaitan, Senior Partner at sakate.khaitan@khaitanlegal.com or Abbas Jaorawala, Consultant at abbas.jaorawala@khaitanlegal.com.

Footnotes:

1. A person who is of Indian origin but citizen of another country.
2. Financial Year in India is for the period April to March.
3. Income from foreign sources has been explained to mean income which accrues or arises outside India but does not include income derived from a business controlled in or a profession set up in India.
4. NRI is a popular term loosely used for non-resident Indian citizens or persons of Indian origin.
5. The tax authorities may seek this information to expand the scope of taxable income in India. However, it may be possible to argue that as an RNOR, the NRI is not required to provide details of foreign assets and income to Indian tax authorities.