PAN for all investments a panned idea

A THRESHOLD FOR INSURANCE PRODUCTS MAY AS WELL SERVE THE PURPOSE WITHOUT HITTING PENETRATION
AHEAD of this year's budget, insurance regulator IRDA's views were sought by the government on a proposal to make permanent account number (PAN) mandatory for investments in insurance products. One of the mandates of financial regulators in the country is to develop the market, besides of course oversight of the industry. The insurance regulator seemed to have taken that mandate seriously for it didn’t quite favour the move to quote PAN for insurance products. IRDA's rationale was that this would dampen the enthusiasm of distributors of insurance products, mainly individual agents, on whom the inusurance industry leans heavily. The obvious worry was that given the low level of insurance penetration in the country, a diktat on PAN could put off potential investors. Indeed, insurance penetration in the country is low. Measured in terms of premium collections, the penetration is close to 4.1% of GDP in life and 0.6% of the GDP in the non-life segment. This is way below the figures for insurance penetration in developed countries such as the UK and Japan. According to the insurance industry, distributors, who are a key link in the chain of activities in the insurance sector, are already complying with rigorous documentation norms. The insurance industry is apprehensive about getting bogged down in more paperwork if PAN is made mandatory for policy holders buying insurance products. There are further arguments. The insurance regulator also made out a case that insurance companies were obtaining PAN from clients whenever the premiums paid or sum assured breached a certain threshold. The limits are basically internal benchmarks set by insurers who carry out a due diligence on their clients. The aim is to assess if a policy-holder has the financial ability to pay his premium. Insurers do these checks, although it is not mandated by IRDA. Insurers in India are eyeing huge opportunities in rural areas and argue that compulsory quoting of PAN could dampen their sales in these markets. Getting farmers, for instance, to buy insurance policies could be a challenge as many of them may not possess a PAN card. Perhaps, the case built up by IRDA was not strong enough. The government went ahead and announced in the budget that PAN would be made mandatory for all transactions in the financial market, subject to a certain threshold. The limits will now be imposed by the finance ministry in consultation with IRDA. Like the insurance industry, the mutual fund industry too, raised a hue and cry over the government's move to make PAN mandatory for investments in mutual funds. Fund houses had then raised the bogey that it could impact investments in mutual funds, and instead money may be diverted to Unit Linked Insurance Plans (ULIPs) offered by insurance companies. But the government did not budge and made PAN mandatory for investments in mutual funds. No threshold was set for mutual funds. Similarly, transactions in the securities market are also covered. An investor needs to have a PAN to open a demat account even if he trades only in one share. Over the last few few years, PAN has evolved from being just an identification number of income tax purposes. It has virtually become a citizen's identification number, though the last word on this is not out yet. Besides an individual, banks, credit card companies and other agencies are now required to quote PAN of their clients in select financial transactions. The data is then matched with the tax-returns of the individual to see if he is short-paying or evading taxes. In short, PAN is handy to establish an audit trail in financial transactions. So, there is no case for excluding investors buying ULIPs from quoting PAN. Ulips are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. The investments are similar to a mutual fund, though insurers say that a oneto-one comparison may not be correct. A threshold if at all may be justified for insurance products other than ULIPs- mainly pure life cover. But the bulk of the products being peddled by the industry are ULIPs and firms here say that they are no different from other markets. So, if at all a threshold is justified, what ought to be the threshold for other insurance products? Perhaps a good benchmark could be the limit set for insurance companies reporting transactions under the anti-money laundering legislation. Here, micro insurance policies with an aggregate annual premium of up to Rs 10,000 (from all policies) are exempt. The limits could be reviewed periodically when with rising incomes the ceiling could be raised.

Source: The Economic Times