20000119

Insurance Association of Pakistan

1) Limitation on expenses of management

The amendment stipulated that any expenditure in excess of the limits laid down in 1958 in the Insurance Act, shall be inadmissible and liable to tax at 33%. The Insurance Act, in effect provided that expenditure upto 22% of premium of Rs 4.5 million and 15% on the remaining premium, shall be admissible subject to the condonation by the Controller of Insurance, of the excess expenses, on reasonable grounds.

Since, in 1958, some 42 years ago when premium incomes of 99% companies were between Rs 1 million to Rs 3/4 million, these limits on management expenses were workable, being less than Rs 4.5 million as above. Now, that the premium income of most of the companies ranges between Rs 50 million to Rs 3000 million, practically, all the companies shall now be required to restrict their expanses to 15% only of their premium against the current average expense ratio of 22% of the insurance industry.

There are no limits on the management expenses of any trade/industry in the country. Limiting the expenses to 15% of the premium income is quite unrealistic and unworkable. It is requested that the same be withdrawn with immediate effect to save the insurance industry from complete ruination.

2) Increased tax rate on dividend income from 5% to 33%

The dividends received by insurance companies are now subject to company's normal tax rate, i.e. 33% as against the much lower tax rates in the case of other companies as stated below:

a) A public company other than insurance company 5%

b) A foreign incorporated company and

foreign association 15%

c) Other companies 20%

This is a case of sheer discrimination as other public companies including banking companies, pay tax @5% only on dividends. The tax rate on dividend income of insurance companies, therefore, justifiably needs to be brought at par with other public companies, namely 5%.

3) Capital gains tax Ñ exemption not continued

The income tax on capital gains was first exempted in January 1997 and after in 1998 for two accounting years, namely 1996 and 1997. Therefore, this has been denied to them whereas they in fact rebuild the industry and trade (by settlement of insurance claims). It is most unfortunate that capital gains of insurance sector which constitutes hardly 1.5% of the total market capitalisation at the country's Stock Exchanges, are subject to 33% tax, whereas all other public companies having 98.5% of the market capital, are allowed tax exemption on their capital gains. It is highly discriminatory and unjust. It is requested that tax exemption be restored to insurance companies as well, to let them play their role in the capital formation through the stock market.

4) Tax reserves

It has been decided to levy a tax on public companies (other than a scheduled bank or a Modaraba) at 10% on the amount of Free Reserves exceeding 50% of their Paid-up-Capital on declaration of dividend below 40% of the after Tax Profit for the year!