Insurance Sector To Become Victim Of Drastic Tax Structure Reform!

We all know our government very well. Every time it’s in the news, chances are high that it’s imposing a new tax. The situation is the same this time as well because the government of Pakistan might be bringing huge changes in the tax structure of the insurance industry by levying a new tax on insurance premium that could negatively affect the growth of an industry that’s already in its young years of growth.

“Finance Minister Mr. Ishaq Dar is said to have approved a budget proposal to charge a single income tax rate of 31% from the new financial year 2016-17, on all sources of income of insurance companies,” said sources in the Federal Board of Revenue (FBR).

At the moment, insurance income is put into various categories with tax rates from 10% to 32%. It’s pertinent to mention here that it’s not just the insurance sector that gets taxed within different brackets. Other corporate sectors also get the same treatment.

Finance Minister Mr. Ishaq Dar has also cleared a budget proposal to levy a withholding tax on insurance premiums,” added the sources. “A rate of 1% withholding tax may be imposed on life insurance while for general insurance it could be as high as 4%.”

According to an alternate proposal, the government is also likely to increase tax rates on health and life insurance commission agents who are non-filers of income tax returns, while the minimum tax on corporate service providers, who submit their accounts for audit, may also go up from 2% to 2.5%.

The size of the insurance business in Pakistan is very small, constituting about 0.8% of Gross Domestic Product (GDP) including the public sector insurance companies. This ratio is 3.8% in India, 3% in China and 8.6% in Germany.

According to the Insurance Association of Pakistan (IAP), there are six private insurance companies working in life insurance business excluding state-owned State Life Insurance Company. The private life insurance companies’ gross premium stood at Rs74.2 billion and they earned Rs3.2 billion profit after tax in the year ended on December 31, 2015. The 30 general insurance companies had gross premium of Rs61.3 billion and their after-tax profit stood at Rs13.6 billion, according to the IAP.

The government may increase the income tax rates on dividend income and capital gains to bring it at par with the standard corporate tax rate of 31% for the insurance sector, said the sources.

Currently, the income of insurance business, dividend income and capital gains is taxed in the range of 10% to 32%. The standard corporate rate of 32% will be reduced by 1% to 31% next year under a five-year corporate tax rate reduction plan. However, to counter the effects of this reduction, the government has been steadily increasing the rates of other source like dividend income.

The FBR thinks that insurance companies tend to invest in stocks and mutual funds to avail tax benefits and the purpose of a change in tax structure is to discourage this tendency.

The private insurance business hardly exists in the country and any upward revision in tax rates will have devastating effects on the sector and the insurance cost will go up, said Policy Research Institute of Market Economy (PRIME) Executive Director Ali Salman.

“The heavy presence of public sector in the insurance business is also detrimental to the sector’s growth. Moreover, the foreign exchange that the country earns by exporting the re-insurance services could also get affected due to these changes,” he added.

The government may also slap 1% withholding tax on life insurance premiums and claims and 4% on general insurance. The insurance sector is so far exempted from payment of withholding tax.

The commission paid to life and health insurance agents is taxed at the rate of 12% for filers and 15% for non-filers. The government may reduce the rate for filers to 8% but for non-filers the rate may be proposed to increase to 16%.