20000119

Insurance industry's

problems highlighted

ARSHAD AWAN

KARACHI: The Pakistan Insurance Association has highlighted four problems being faced by the industry in the country including limitation on expenses of management; increased tax rate on dividend income from five percent to 33 percent; capital gains tax, and tax on reserves.

In a memorandum presented to the Ministry of Finance, the association has said that all these problems are linked with amendments/provisions (through the Finance Act,1999) in the Income Tax Ordinance 1979.

In respect of 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 percent.

The Insurance Act, in effect provided that expenditure up to 22 percent of premium of Rs 4.5 million and 15 percent 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 income of 99 percent companies was between Rs 1 million to Rs 3 to 4 million, these limits on management expenses were workable, being less than Rs 4.5 million.

But at present the premium income of most of the companies ranges between Rs 50 million to Rs 3000 million, so all the companies will now be required to restrict their expenses to 15 percent only of their premium.

"There are no limits on the management expenses of any trade/industry in the country. Limiting the expenses to 15 percent 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 It is requested that the same be withdrawn with immediate effect to save the insurance industry from complete ruination," the association stressed.

The association added the dividends received by insurance companies were now subject to i.e. 33 percent tax as against the much lower tax rates in the case of other companies, which are: 5 percent for a public company other than insurance company; 15 percent for a foreign incorporated company and foreign association; 20 percent for other companies.

The association is of the view that this is a case of sheer discrimination as other public companies including banking companies, pay tax at the rate of five percent 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 five percent," the Association said.

The income tax on capital gains was first exempted in January 1997 for two accounting years, namely, 1996 and 1997. Thereafter, the exemption was withdrawn.

"It is most unfortunate that capital gains of insurance sector which constitutes hardly 1.5 percent of the total market capitalisation at the country's Stock Exchanges, are subject to 33 percent tax, whereas all other public companies having 98.5 percent of the market capital, are allowed tax exemption on their capital gains," the Association said.

This was highly discriminatory and unjust, the association said and 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.

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

"Like the banks, an insurance company builds up its reserves in order to safeguard the interest of its clients in case of losses. Thus building of reserves is an essential element of an insurance company's financial strategy," the association viewpoint.

The association requested that insurance industry also be exempted from this levy like the scheduled banks and Modaraba companies.