Budget expectations 2025: Financial Services

Himanish Chaudhuri, Partner and Financial Services Leader, Deloitte India

Current environment

• The Indian economy continued to exhibit resilience during 2023–24 amid geopolitical tensions. The real GDP growth improved to 7.6 percent in 2023–24, coupled with foreign exchange reserves crossing an all-time high of US$700 billion in September 2024. With India striving to become a developed nation by 2047, i.e., Viksit Bharat, the financial services sector will have to be a key enabler to achieve this aspiration.

• India’s banking sector is in a strong position, with banks adequately capitalised. Digitalisation has made banking convenient to customers and assisted in financial inclusion, with India accounting for nearly 46 percent of the world’s digital transactions.

• Despite volatility in the global financial markets, the Indian capital markets became one of the best-performing emerging markets in 2024. The inclusion of Indian government bonds in the global bond indices has attracted significant capital inflows estimated to range from US$20 billion to US$25 billion. Additionally, India’s primary equity markets outperform regional peers in 2024, showing a remarkable increase in IPOs. India today has the 5th largest capital market in the world.

• The government has announced various initiatives to promote India’s financial sector and maintain the optimism of global investors. This inter-alia includes (i) the financial services vision and strategy document, laying down the guidance for the next 5 years, (ii) the set up of a data repository, the Reserve Bank-Climate Risk Information System (RB-CRIS), to provide regulated entities necessary data to undertake a climate risk assessment and (iii) simplification and revamp of Indian exchange control regulations and income tax laws.

• While the outlook of financial services looks bright, the sector will have to grow 20 times, to support India’s vision of Viksit Bharat. To achieve this momentous growth, the sector will continue navigating the ongoing geopolitical tensions, fostering financial inclusion and discipline, embracing new technology and innovations and creating a robust risk management framework.

Ask# 1: Accelerate the growth of IFSC GIFT City

• • IFSC GIFT city is the cornerstone of India’s vision to become a global financial hub. The existing liberalised regulatory and tax regime has improved the attractiveness of IFSC GIFT City. This has increased the activity level in IFSC GIFT City, which is still largely focused on India inbound. To accelerate IFSC GIFT City's development, promoting India's outbound activities and establishing IFSC GIFT City as a global financial services hub is essential. This will help it compete effectively with other leading international finance centres (such as Hong Kong, Singapore, London and Dubai).

• A critical challenge hampering the growth of IFSC GIFT City is the inability to attract and retain skilled talent. This issue can be resolved by extending various fiscal incentives to (i) employees who work in IFSC GIFT City (by way of tax rebates) and (ii) the employers who create more employment opportunities in IFSC GIFT City (by way of additional weighted tax deductions/rebates).

• The following measures may be considered for onshore emerging financial services to IFSC GIFT City:
  a. Non-banking units in IFSC GIFT City who are now permitted to deal in Offshore Derivative Instruments (ODIs), with Indian securities as underlying, should be extended similar income tax benefits that apply to the IFSC GIFT City banking units (and their clients) dealing in ODIs.
  
  b. To allow finance companies in IFSC GIFT City to undertake Global/Regional Corporate Treasury activities efficiently without creating adverse tax consequences, it is important to exempt such activities from the applicability of deemed dividend provisions.
  
  c. To promote banking activities in IFSC GIFT city, the LRS remittances undertaken by AD Banks, currently subject to a TCS rate of 20 percent, should either be either exempted or subjected to a lower rate (e.g., 5 percent) if processed through a banking unit in IFSC GIFT City.
  
  d. It is requested that the sunset clauses be extended by a minimum period of 5 years to allow new players to commence operations in IFSC GIFT City and take benefit of the income tax incentives. This includes (i) investment division of an offshore banking unit (sunset clause expiring on 31 March 2025), (ii) ship leasing and aircraft leasing businesses (sunset clause expiring on 31 March 2025) and (iii) India-based fund managers proposing to manage overseas funds (sunset clause expiring on 31 March 2024). Likewise, the sunset clause (31 March 2025) should be extended by a minimum period of 5 years to allow offshore funds to relocate to IFSC GIFT City tax-efficiently.

• To increase the attractiveness of IFSC GIFT City, consider applying a lower income-tax rate (15 percent) upon completion of the income-tax holiday period.

• To provide tax certainty, consider (i) exempting the applicability of General Anti-Avoidance Rule (GAAR) provisions to arrangements entered by or with IFSC GIFT City units and (ii) having a separate income-tax law and a common income tax office/cell in IFSC GIFT City to apply exclusively to IFSC GIFT City units.

Ask #2: Incentivising infrastructure investments by Sovereign Wealth Funds (SWFs) and Foreign Pension Funds (FPFs)

• Infrastructure development is among the nine priorities of the government to achieve its vision of Viksit Bharat. To attract long-term, stable and pedigreed foreign capital in infrastructure projects, further rationalising the current income-tax regime is needed [section 10(23FE)]. Accordingly, the following measures may be considered:
  
  a. As large-value infrastructure investments take time to finalise and implement, the sunset clause (31 March 2025) for implementing new infrastructure investments should be extended by a minimum period of 3 years.
  
  b. Any payment made to a notified SWF and FPF, which is exempt from tax in their hands, be exempted from the applicability of Indian withholding tax provisions.
  
  c. To promote nationwide infrastructure development, the income-tax benefits should be extended to infrastructure investments implemented through existing domestic holding companies that are set up and registered before 1 April 2021.
  
  d. To promote reinvestment in new infrastructure projects and reduce the incidence of double taxation, dividends received by the domestic holding company from its SPVs should be exempted from tax to the extent such dividends are reinvested in qualifying infrastructure projects.
  
  e. The notified SWFs and FPFs should be exempted from the long-term capital gains arising from an indirect transfer of Indian infrastructure assets held through an overseas holding entity.
  
  f. The notified SWFs and FPFs should be exempted from long-term capital gains arising from eligible investments implemented in the form of unlisted bonds/debentures, regardless of the deeming fiction to treat such capital gains as short-term.

Ask #3: Diversification of India’s financial services sector

• India’s strong macroeconomic fundamentals have created the right platform to promote global diversification of India’s Asset Management industry. While the industry continues to grow domestically, it is important to create a conducive environment for Indian mutual funds to penetrate global markets.
  
  An imperative need has emerged to raise the current overseas investment limit (both industry level limit and individual fund house limit) placed on Indian mutual fund houses to invest overseas. With the current investment limits hitting a ceiling, Indian mutual fund houses have been restricted from accepting further monies for investing overseas. A significant increase in India’s forex reserves (reaching an all-time high) and a strong inflow of foreign capital create a compelling case to increase the existing industry level limit of US$7 billion and individual fund house level limits. The aforementioned will also (a) provide Indian investors with increased investment opportunities at the global level and (b) likely attract global mutual fund houses to set up shops in India to target Indian investors, which will consequently promote the growth of the industry and create more jobs in India.
  
  Additionally, the increased overseas investment limits will catalyse Indian mutual fund houses to launch global funds in India that invest directly in overseas securities rather than the prevailing fund-of-fund structures. This will augment India’s mutual fund industry.
  
  Lastly, the Indian government should work towards introducing the concept of “passporting,” in line with overseas standards, that allows Indian mutual funds to freely market their schemes in other countries without facing any regulatory restrictions in the host country. This will create a market for Indian mutual funds globally, allowing them to target foreign investors beyond the overseas Indian diaspora (i.e., NRIs / PIOs / OCIs).

• Position India as a fund management jurisdiction
  Led by a strong growth story, India has emerged as a hub for private equity investment by global investors. Despite this, India has not been able to position itself as a global fund management jurisdiction. One of the key challenges dissuading foreign private equity fund managers from freely operating from India is the lack of clarity on the taxability of carried interest (or carry) in the hands of fund managers, i.e., the share of the fund’s profit allocated to the fund manager. Most fund management jurisdictions provide clear tax laws on the taxability of carried interest, wherein carried interest is treated as investment income subject to a concessional income tax treatment with no indirect tax levy (such as VAT or GST) on such payments. On the other hand, Indian income tax laws do not contain any specific guidance on the taxation of carried interest, thereby creating uncertainty on the taxability of such income, with a potential adverse outcome of such income being taxed as ordinary income subject to the full tax rate. Moreover, a recent tax ruling has held that carried interest paid to a fund manager is in nature of service fees, thereby falling within the incidence of GST levy. Given the above, to promote India as a fund management jurisdiction, the Indian government must take a leaf from international practices and issue clear and concessional tax law, providing guidance on the taxability of carried interest as follows:
  
  (a) Carried interest be deemed to be taxed under the head “Capital Gains” in the hands of fund managers; and
  
  (b) Carried interest be exempted from the GST levy.

• To realise India’s vision to become an international financial services centre, the Indian government must provide an attractive gateway for foreign financial services players to enter India. Foreign players create a competitive landscape by bringing best practices, quality customer services and innovative financial products and services. One challenge that such players face is the incidence of high tax rates and challenging entry norms vis-à-vis other global financial services centres such as Singapore and Hong Kong.
  
  While IFSC-GIFT City is a step in the right direction, providing a liberalised regulatory and tax framework, similar measures are suggested to liberalise the regulatory and tax framework in mainland India. This will attract financial service players such as foreign broker-dealers, reinsurance companies, prime service providers and global custodians, who have until now refrained from establishing a presence in India.
   

Policy recommendations and expected impact

• To onshore the offshore to IFSC GIFT City, the following policy measures may be considered:
  
  a. Expedite issuance of a regulatory and tax framework for the use of a Variable Capital Company (VCC) structure, in line with international standards, to house funds in IFSC GIFT City.
  
  b. Establish a liberalised regulatory and tax framework to attract internalisation of Indian start ups to IFSC GIFT City.
  c. Fast track the set up of an International Arbitration Centre in IFSC GIFT City.

• To promote the financial stability of the banking sector, the government may consider (i) accelerating the privatisation of public banks and (ii) introducing common guidelines in effective governance, data protection and addressing cyber security risk.

• It is recommended that the Harmonised Master List of Infrastructure Sub-sectors be updated more frequently to provide impetus for investment in new and emerging infrastructure sub sectors.

Contributed by: Russell Gaitonde, Partner, Deloitte India
 

Budget expectations 2025: Insurance

Debashish Banerjee, Partner, Deloitte India

Current environment

• The insurance sector has been doing well since December 2023; however, the momentum slowed in May–June 2024. The country is experiencing interesting times with a growing GDP and an expanding middle-class population.

• The growth in new life insurance policies remained range-bound at about 12.1 percent in June 2024. However, the increase in the number of LIC policies sold in June 2024 was marginally higher than private companies.

• The non-life insurance industry remained range-bound. The underwritten gross premium grew 15.5 percent in April–May 2024, with the general insurance and stand-alone private health insurance growing 14.8 percent and 26.5 percent in the first two months of this fiscal year.

• The sector is in a transitional phase, moving from traditional business models to more technology-driven and customer-centric approaches. Insurance companies are adopting new technologies, such as AI, ML and GenAI, to offer better and customised products and services to customers.

• With government initiatives such as “Insurance for All” by 2047, removing reinsurance commissions and co-insurance premiums as taxable services are likely to benefit the industry.

• It is performing well in areas such as digital transformation, microinsurance growth and the adoption of ESG principles.

• It faces challenges such as declining margins in traditional insurance lines, rising claims costs, regulatory pressures and the complexity of underwriting emerging risks such as cyber threats.

Expectations
Top three asks

Ask #1: Making the regulatory framework suitable for increased participation from different players.

• Specific measure: Global insurance firms are keen to enter the Indian market, driven by its vast potential. Markets such as Japan, Australia and New Zealand are more penetrated than India. Can we bridge this gap by relaxing the FDI regulations to attract more foreign capital into the insurance sector, which can be crucial for expanding the industry's capacity to underwrite and invest?

• Outcome: Facilitate entry of more players or tie up of Indian companies with foreign firms. Leads to the overall growth of the industry and newer products.

• Rationale: The entry of more players or the tie-up of Indian companies with foreign firms will foster innovation in products and competition for the market, which may translate to higher penetration and seamless services to end customers.

Ask #2: Policies and support for Digitisation, fair collection and usage of data

• Specific measure
  • The shift to digital platforms is expected to continue growing in the insurance space. Budgetary allocations may be made to support digital insurance infrastructure, such as reducing the burden of licensing or regulatory approval for insurance companies.
  
  • In addition, policies on fair collection and usage of lifestyle data from customers can help build data-backed solutions to assist underwriting, risk management and claims operations. A budget outlay for collecting and maintaining such lifestyle data via insurance data centres can help develop lifestyle and disease predictive models to better predict risk.

• Measurable outcome: More AI and data-backed products are produced to improve customer services and claims operations. This will bring more expertise, especially in underwriting and risk assessment and setting up early life and health insurance warning systems.

• Rationale: Digital-first insurance models are the future to improve customer service and innovate new products. InsurTech companies are focused on innovating new technologies across the insurance lifecycle.

Ask #3: Facilitate better Public-Private Partnerships (PPPs), especially in the life and health insurance space

• Specific measure: Enhance collaboration between private insurers and public health programmes and include budget provisions to increase coverage and affordability.

• Measurable outcome: Increasing penetration of life and health insurance in rural areas and boosting the “Insurance for All” scheme.

• Rationale: Policyholder protection and financial inclusion remain central to discussions around reforms and funding as governments increasingly seek to ensure that insurance products are accessible, affordable and effective in mitigating risk.

Policy recommendations
Recommendation #1: Set an outlay in the budget to foster PPP and create an advisory board to speed up “Insurance for All” schemes.

• Details: Establishing a board comprising industry leaders, academic experts, technologists and policymakers dedicated to boosting insurance penetration would be a key strategy in tackling the challenges of accessibility, affordability and awareness in India’s insurance sector. By fostering collaboration between public and private stakeholders, encouraging innovation and advocating for policy reforms, such a board can help bring insurance benefits to millions of underserved and economically vulnerable citizens across the country.

• Expected impact: Accelerate insurance penetration, formulate better policy, advance technological advancements for digital transformation and improve product development and design, all of which will ultimately benefit the customer seeking insurance.

Recommendation #2: Address supply-side issues on priority, including limited talent availability and reinsurance capabilities in 3–5 years.

• Details:
  • Push talent supply
  • More institutions should be established to train individuals in both technical and non-technical skills. There is only one institute for training insurance professionals—the National Insurance Institute.
  
  • Attract more talent globally or use the GCC model to provide necessary talent, especially in the back-office functions.

• Boost insurance penetration of peril insurance
  • Given recent climate change and increased calamities, peril insurance penetration must improve from its current low levels.
  
  • Need to boost efforts on increasing insurance awareness and providing simplified products with improved trust.

• Address the impact of Ayushman Bharat on private insurance
  • It is essential to assess and address the impact of providing free health insurance for senior citizens under Ayushman Bharat, which could lead to a decrease in retail premiums and an increase in group/government premiums

• Establish another reinsurer
  • Considering the expected growth, increased wealth and data, it may be beneficial to establish another reinsurance company inaddition to GIC.

• Expected impact: The move towards more transparent and proactive regulations is critical; developing internal capabilities to manage the scale of expansion is needed in the insurance sector in the next 5–7 years.