Insurance Sector Advocates for Tax Overhaul to Ease Financial Strain

The insurance sector is pushing for the abolition of double taxation to alleviate the administrative and monetary pressures it faces. The industry is advocating for insurance taxation to be brought under federal authority to guarantee consistency and prevent the imposition of double taxes at the provincial level.

In a recent discussion, Shoaib Javed Hussain, Chairman of the Insurance Association of Pakistan (IAP), mentioned that the IAP has presented recommendations to the Federal Board of Revenue and the Ministry of Finance regarding the streamlining of insurance taxes.

Hussain emphasized that removing overlapping tax jurisdictions between the federal and provincial governments would lower compliance expenses and operational obstacles, ultimately benefiting policyholders.

Hussain, who also serves as CEO of State Life Insurance Corporation (SLIC), stated, “A uniform tax structure is vital for smooth integration across provinces and the creation of a unified national financial framework.”

Need to Boost Insurance Penetration

Hussain noted that the insurance sector in Pakistan produced over Rs613 billion in gross premiums in FY2023, with life insurance representing about 66% of this amount. Despite its inherent potential, insurance penetration remains below 1% of GDP, which is markedly lower than that of regional countries like India (4%), China (3.9%), and Sri Lanka (1.2%), indicating substantial untapped opportunities for expansion.

The global average is 6.7%, suggesting the industry has the capability to expand by 800% merely to reach the average. Focusing on industry growth could greatly enhance its contributions to the nation’s tax revenues and overall economic wellbeing in the future.

According to Hussain, there is a pressing requirement to further encourage insurance purchases through sustained income tax benefits and eliminating provincial sales taxes. He proposed reinstating tax credits on life, health, and microinsurance premiums.

He elaborated that “Tax credits would foster a culture of saving and offer considerable relief to the salaried class, which carries a major portion of the country’s tax obligations while endeavoring to provide for their families.” He further added that such initiatives would encourage greater adoption of insurance across the nation.

He also pointed out that tax credits should be seen as a crucial instrument for savings and investment for the general populace, in addition to bolstering the financial inclusion objectives of the Government of Pakistan.

He further explained that levying taxes on insurance premiums, whether via provincial sales tax or federal turnover tax, constitutes an additional direct tax on individuals looking to save for important life events or seeking protection against unforeseen emergencies.

He maintains that further incentivizing insurance uptake via the elimination of premium taxes is essential, especially since the taxation of life insurance firms is governed by the Fourth Schedule, and turnover tax ought not to apply.

He asserted that insurance serves as a risk management instrument, not a source of earnings, and taxing premiums would dissuade both businesses and individuals from allocating funds to risk mitigation.

He clarified that premiums acquired by life insurers represent contingent liabilities intended for resolving future claims—not operational revenue—and are already taxed when yearly surpluses are distributed to shareholders.

Capital Market Taxation

Another proposal from IAP for incorporation in the upcoming financial plan for 2025-26 involves revising capital market taxation. The insurance sector is advocating for a revision to the existing tax regulations on capital gains and dividend income to more appropriately reflect the specific traits of the industry—instead of using the same criteria applicable to banks and financial institutions.

The Chairman of IAP clarified that the legislative perspective of treating insurance and banking industries on par is flawed. Insurance firms cover the risk of loss for the insured for a modest premium. To effectively manage this risk, they must diversify their asset allocation across various investment options, each carrying varying degrees of risk appetite.

The IAP chairman has urged the elimination of Rule 6B of the Fourth Schedule, which was enacted via the Finance Act of 2016. This rule combines capital gains and dividend income as a singular taxable source for insurance firms, a measure that the industry contends has adversely impacted the earnings of both life and non-life insurance providers.

Hussain voiced confidence that streamlining this approach would restore impartiality and deepen the capital market.

He highlighted that numerous countries exclude insurance from VAT and related taxes, acknowledging its unique financial architecture. Adapting to these global leading practices would foster financial inclusion, expand insurance penetration, and promote sectoral expansion in Pakistan.

The Chairman of IAP affirmed that the industry fully recognizes its responsibility toward the financial and economic robustness of the nation and stands ready to support governmental efforts in achieving these goals.

He remarked that the insurance sector is capable of playing a crucial role in the country’s economic progress and prosperity by serving as a significant contributor to capital markets and infrastructure ventures and by extending social safeguards to the most vulnerable segments of society.

He concluded by mentioning that IAP has also reviewed these budget proposals with the regulator, the Securities and Exchange Commission of Pakistan, which has endorsed them, recognizing the insurance sector’s importance in bolstering the national economy.

Introduction:

Shoaib Javed Hussain is the CEO and Chairman of the State Life Insurance Corporation of Pakistan.

He holds an MSc degree in actuarial management and is a Fellow of the Institute of Actuaries, UK. He started his professional journey at an actuarial consultancy in Pakistan.

He possesses over two decades of managerial expertise at prominent global insurance groups and consultancies spanning the UK and Asia. Prior to his tenure at SLIC, he occupied senior leadership and management roles within a Hong Kong-based multinational insurance and finance firm known as AIA Group Limited.

Currently, he also holds the position of Chairman of the Insurance Association of Pakistan (IAP).