The government has formed a task force to draft a new direct tax legislation to rewrite the decades-old Income Tax Act, 1961. The changes are expected to affect taxation on insurance companies.
The task force shall submit its report to the government within six months, said the Finance Ministry. However, sources said the recommendations of the task force would have to be examined in detail and are unlikely to take final shape before 2019, reported Hindu Business Line.
The new legislation will be drafted keeping in mind the direct tax system in other countries, international best practices and the economic needs of the country, a Finance Ministry statement said.
Impact on insurers
Kotak Institutional Equities said a revamp of the direct tax law would result in high taxes on insurers.
“We see a higher tax impact (25% versus the current rate of 14.3%) and estimate 7-9% lower EV and RoEV for HDFC Life, ICICI Life and Max Life and a 13-17% decline in NBV margins,” the brokerage said.
Previous attempts to overhaul direct taxes were not successful. In 2009, a tax Bill had suggested radical changes, including:
- Income from insurance for policyholders is to be considered under the EET method (exempt, exempt, taxed; that is, insurance income should be taxable) unless premium payable is less than 5% of the sum assured.
- Life insurance companies should pay income tax at corporate tax rates (proposed at 25%) as compared to the existing 14.3%.
However, the 2009 Bill has lapsed as the former government lacked the numbers in parliament to pass amendments.