The government is likely to relax the proposed norms on minimum alternate tax (MAT) for insurance companies. The finance ministry is expected to accede to the insurance industrys demand and treat insurance companies at par with banks under the new Direct Tax Code.

The draft code proposed a two per cent MAT based on the gross asset value on all non-banking companies and 0.25 per cent for banks. The value of gross assets is the sum of the value of the property a company owns, including aggregate value of fixed assets, capital works in progress and the book value of other assets.

Sources close to the discussions on the Direct Tax Code told Business Standard there was a presentation made by the insurance industry, by both the life and non-life segments, against the proposal, and the finance ministry has assured that the demand would be considered.

However, out of the 800 amendments being sought by the entire industry in the draft document, the finance ministry has shortlisted only eight items on which amendments are expected when the Direct Tax Code is finalised. The ministry is looking at these eight demands, which included MAT on insurance companies.

MAT will have an adverse impact on the insurance industry. Pure term plans will become more costly, while endowment plans will see reduction in returns at the time of maturity. Insurance companies with large Ulip (unit linked insurance plans) books will see a significant reduction, as mutual funds do not pay anything, said Hiresh Wadhwani, Partner, tax and regulatory services, Ernst & Young.

At present, under the Income Tax Act, an insurance company is required to pay regular income tax on the actuarial surplus. The code proposes the exempt-exempt-tax (EET) principle on all insurance products, which would mean the policyholders funds would be taxed at maturity and therefore, income tax will now be applied on shareholders income.

Since no private life insurance company is profitable, none of them pays tax. Insurance companies will have to pay MAT or 0.25 per cent of the gross assets if this exceeds the regular income tax on the shareholders income.