In the old days we used to dread the DTC " a term used to describe the notoriously inefficient Delhi Transport Corporation buses. Now it is the new DTC (direct tax code) which strikes fear in our hearts," jokes the head of a life insurance company.

His attempt at humour reflects the sentiment of the Rs 9 lakh-crore life insurance industry towards the new tax code. The industry's biggest fear is that the tax code, which will put more money in the hands of the tax payer, could undo everything that the industry has worked toward for all these years.

When the finance minister unveiled the direct tax code a couple of months back, the proposals were so radical that no one really thought that they would get implemented anytime soon. However, the enthusiasm with which the government is pursuing the proposals has led to fears that some measures may be implemented sooner rather than later.

The industry was under the impression that since the DTC represented a long-term goal, the industry would have enough time to respond to the proposals. However, when it was learnt that feedback had to be provided by October 10, they realised the seriousness and the Life Insurance Council hastily appointed PriceWaterhouseCoopers to make representations to the government on the industry's behalf.

"The proposed DTC provisions, especially minimum alternate taxes (MAT) on gross assets and lack of clarity on carry forward of accumulated losses could be extremely adverse for life insurance companies," says Punit Shah, executive director, PriceWaterhouseCoopers.

The other devil in the fine print is the absence of a 'grand fathering' clause. For investments like the provident fund, the DTC specifically provides that sums accumulated in provident funds up to March 2011 will be exempt from tax. However no such clause has been provided for life insurance.

"It would be appropriate for the ministry to clarify that the proposed lower threshold of premium for tax exemption for policyholders, which itself may need to be enhanced, would apply prospectively for the policies issued post April 1, 2011," adds Mr Shah.

Of all the proposals in the tax code, the most damning is the one, which subjects a company, other than a banking company to a minimum alternate tax of 2 percent of gross assets. The impact of the proposal is so devastating that the insurance industry is sure that it is all a mistake.

"The tax code recognises insurance companies as pass-through entities. So it is natural that there should a differentiation between shareholder funds and policyholder's funds." says GV Nageswara Rao, MD & CEO, IDBI Fortis Life Insurance. He adds that a 2 percent minimum alternate tax is too high, given the return on assets.

According to SB Mathur, general secretary of the Life Insurance Council, the tax code is unfair to life insurance companies vis-à-vis its treatment of mutual funds.

"While life insurance is being moved to an EET regime, investments in mutual funds above a year will effectively be EEE since there are no long-term capital gains."

"There is a discrepancy in the treatment of mutual fund and life insurance proceeds. The income distributed by mutual fund is not subject to tax in the hands of the investors, but there is no provision which exempts periodic income earned by policyholders from the insurance policy. Similarly, profits realised on sale of mutual funds are dubbed as capital gains and investors can claim indexation benefit. But as per the draft code, income from life insurance policy is proposed to be taxed as income from residuary sources and the policyholders are deprived the benefit of indexation," says Kamesh Goyal, country manager, Allianz & CEO, Bajaj Allianz Life Insurance.

"From an era of stupendous growth, the life insurance industry got into a phase of lower growth and is now entering into a phase of a possible negative growth. It is important for us to recognise these factors that are leading to such a situation. Direct tax code is one such trigger," says Rajesh Relan, Metlife India.