System loopholes: Insurance industry demands fair taxation

Tax authorities ‘misinterpret’ legal statutes, current practice contrary to guidelines .

KARACHI:

The insurance industry has demanded that the use of policyholders’ reserves should again be allowed as a deduction from income for the payment of final claims on the maturity of policies or in the event of policyholders’ death. 

Addressing a press briefing on Monday, office bearers of the Insurance Association of Pakistan (IAP) said the tax authorities have ‘misinterpreted’ legal statutes, as the current practice is contrary to the guidelines prescribed in the Fourth Schedule to the Income Tax Ordinance 2001.

Moreover, they said tax authorities now consider the maturity proceeds as ‘profit on debt’ by applying the withholding tax on debt instruments. “For amounts in excess of the premium paid, life insurance contracts do not fall under the definition of debt instruments and hence the withholding tax is not applicable to policy maturity proceeds,” said Jubilee General Insurance CEO Tahir Ahmed while speaking on the occasion.

Lamenting the dismal state of insurance penetration in the country, which currently accounts for only 0.82% of the Gross Domestic Product (GDP), Ahmed said the collection of the federal insurance fee (FIF) of 1% of the total premiums received has practically been of no use since 1989. He said approximately Rs3.5 billion has been deposited in the government exchequer since 1989 when it was imposed to create awareness, improve fire-fighting facilities and set up insurance-related educational institutes in the country.

“The IAP recommends that the FIF should be spent on creating awareness and setting up colleges of insurance in all major cities of Pakistan,” Ahmed said.

Saying that the legislation already exists to compensate the affected parties in road accidents through compulsory insurance coverage, he noted that victims in such cases are rarely compensated because of the difficulty in establishing the legal liability.

“Even when the legal liability is established, the compensation is limited to Rs20,000 in cases involving commercial vehicles,” he added.

To address the loopholes in the law, Ahmed said the IAP is developing a scheme that will simplify the compensation process without the need for establishing the legal liability.

Speaking on the occasion, IAP official Ayaz Hussain Gad said the government must extend tax incentives to promote health insurance in the country. “If health insurance is made mandatory by the government, it would not only increase insurance penetration, but also prove to be a step forward in providing low-income people with basic health facility,” Gad said.

Published in The Express Tribune, May 6^th, 2014.

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