Insurance premium: ‘Proposed tax will hurt insurance sector’

Jubilee Life Insurance CEO feels budget measure will discourage long-term savings

KARACHI: The imposition of a withholding tax on insurance premiums in the proposed federal budget for 2016-17 will hurt the industry, which is already suffering from a low level of penetration, according to Jubilee Life Insurance CEO Javed Ahmed.

Speaking to The Express Tribune in an interview, Ahmed said the proposed withholding tax at a “relatively high rate” will negatively impact the savings-to-GDP ratio.

The federal government plans to impose 1% withholding tax on life insurance premiums of non-filers in case they are in excess of Rs200,000 per annum. This will make life insurance costlier for people who do not file their annual income tax returns.

With the penetration of life insurance equalling only 0.51% of the GDP, Ahmed says the withholding tax will further discourage long-term savings in Pakistan. The savings-to-GDP ratio decreased from 14.7% in the preceding fiscal year to 14.5% in 2015-16, according to the latest economic survey.



The proposal to impose a withholding tax on insurance premiums is part of the government’s drive to force people into filing their income tax returns by making financial transactions costlier for non-filers.

For example, non-filers have to pay a withholding tax of 0.6% in case they withdraw or transact over Rs50,000 in a single day. Ahmed says life insurance policyholders who are non-filers already pay the withholding tax on banking transactions whenever they pay a premium exceeding Rs50,000.

Under the directives of the Securities and Exchange Commission of Pakistan (SECP), life insurance premiums in excess of Rs50,000 can only be paid through bank instruments. “This additional tax of 1% is not justified. We are taking up this matter with the Federal Board of Revenue through the Insurance Association of Pakistan,” Ahmed said.

Jubilee Life is the most profitable of the five private-sector life insurance companies operating in Pakistan, with total gross premiums amounting to Rs29.9 billion in 2015.

Super tax

The government has proposed that the “one-time” super tax of 3% on the income of insurance companies - first imposed in the last federal budget - should continue for another year. Every insurance company earning more than Rs500 million will have to pay the tax to help rehabilitate internally displaced people in the wake of Operation Zarb-e-Azb.

According to Ahmed, the impact of super tax for 2015 was around 3.7% on his company’s profit after tax, which clocked up at Rs1.6 billion last year. “The impact for 2016 will be more or less the same, with a proportionate increase being attributed to business growth,” he added.

Uniform tax rate

The government is going to implement a uniform tax rate of 31% on all sources of income for insurance companies July onwards.

Typical income avenues for the shareholders of an insurance company are underwriting profit and investment/other income. In contrast with underwriting income that usually taxed at the corporate income tax rate, different tax rates apply to investment income that originates from dividends, profit on debt and capital gains.

Dividend income is currently taxed at 12.5%. Capital gains arising out of the investment portfolio are taxed at anywhere between zero and 15%, depending on the holding period of the security concerned. As a result, a lower tax rate on investment income would lead to an overall reduced effective tax rate for insurance companies until now.

Many smaller insurance companies in both life and non-life segments thrive on the basis of their investment income. However, Ahmed says the contribution of investment income to his company’s profit before tax has remained within 10% in the past five years.

“Business income was already taxed at full corporate tax rate. Hence, we do not expect a significant impact from the proposed change,” he said.

Published in The Express Tribune, June 17^th, 2016.

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