Shares of life insurers declined after a report said that the task force set up for redrafting the direct tax law could consider increasing the rate for the industry.
While the mandate of the latest panel is still not clear, Kotak Institutional Equities said the 2009 draft proposed to increase the corporate tax rate for life insurance companies to 25 percent from 14.3 percent. The task force will submit its report within the next six months.
Any increase in the tax rate will have a one-time impact on the embedded value—the consolidated value of shareholders' interest in the business—and lower the margins on new business, the report said.
Shares of life insurers declined between 3.5 and 5 percent today in a flat Mumbai market. The companies in their filings for initial public offerings had estimated the impact of a possible tax hike on their embedded value.
The 2009 direct tax code draft had proposed two changes for life insurers:
- Income from insurance for policyholders to be taxed at the time of maturity (exempt, exempt, tax or EET), unless the sum assured is 20 times the premium payable.
- Life insurance companies should pay corporate tax at 25 percent compared to existing 14.3 percent.
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