ISLAMABAD: The Competition Commission of Pakistan (CCP) has expressed serious concern over taxation anomalies in the insurance sector, including federal and provincial sales tax, which have increased the cost of doing business and created a tax burden on the insurance industry.
The CCP has recommended strict monitoring by the regulator, ie, Securities and Exchange Commission of Pakistan (SECP), of the insurance companies, which would be required in the case of reinsurance
The premium is exempt from sales tax, allowing the benefit to be transferred to end consumers in the form of a lower premium. The CCP has highlighted issues in applicable Sales Tax on Insurance and Reinsurance Services, according to a report of the CCP on the insurance sector.
Insurance industry: CCP asks FBR to remove ST anomalies
In Pakistan, federal and provincial sales tax is applicable to the insurance industry. In general, the sales tax on goods is a Federal tax while the sales tax on services is a provincial tax. The Federal Board of Revenue (FBR) collects sales tax on the sale and supply of goods, and on imported goods under the Sales Tax Act, 1990.
The FBR also collects sales tax on services levied under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001.
The sales tax on services that are interprovincial, national, or provided in the Islamabad Capital Territory (ICT), such as telecommunications, IT, banking, and insurance sectors, is collected by the FBR. The provincial governments levy sales tax on services in their respective jurisdictions. Sales tax on insurance (life and non-life), and reinsurance is levied as under:
Punjab under the Punjab Sales Tax on Services Act, 2012; Sindh under the Sindh Sales Tax on Services Act, 2011; Khyber Pakhtunkhwa (KP) under the Second Schedule of the KP Finance Act and Balochistan under the Balochistan Sales Tax on Services (Amendment) Act, CCP said.
The sales tax rates vary across provinces and are driven by the provincial financial
requirements, economic conditions and revenue targets. The provincial sales tax is applicable to both life and non-life insurance schemes and the reinsurance services. However, certain segments of the insurance services, such as life insurance and health insurance services, have been notified as exempted from provincial sales tax108 for a certain fixed period to boost the demand for insurance in the country, the report maintained.
Likewise, marine insurance for export and crop insurance are excluded from the list of applicable sales tax schedule, under the provincial sales tax laws.
While the provincial sales tax on the insurance premium is paid by the policyholder, the provincial sales tax on the reinsurance premium is paid by the insurer, as excess risk is transferred to the reinsurer. At the reinsurance stage, the same insurance premium is collected by the insurer is subject to the sales tax for procuring reinsurance services. This creates a tax anomaly as sales tax is levied on the already taxed premium.
Further, sales tax is applicable on reinsurance even when exempted on life and health insurance and some general insurance, along with withholding tax on the reinsurance commission (ceding commission), paid by the insurers.
The taxation anomalies thus increase the cost of doing business, create a tax burden on the insurance industry at the reinsurance stage, and act as an entry and efficiency barrier, the CCP added.
Copyright Business Recorder, 2025
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