CCP highlights taxation anomalies in Pakistan’s insurance sector, calls for reforms

The Competition Commission of Pakistan (CCP) has raised concerns about the taxation anomalies affecting the insurance sector, which have led to higher business costs and a tax burden on insurance companies. 

The CCP has recommended that the Securities and Exchange Commission of Pakistan (SECP) implement stricter oversight of the industry, especially in the case of reinsurance.

The CCP highlighted discrepancies in the application of federal and provincial sales taxes on insurance services, noting that these tax practices have created a complex and burdensome tax environment. 

The commission’s report emphasizes that while reinsurance premiums are exempt from sales tax, issues arise when provincial sales taxes are applied at various stages, especially when the same premiums are taxed multiple times.

According to the CCP’s findings, the insurance sector is subject to both federal and provincial sales taxes. While federal tax is applied to goods and imported services, provincial sales tax applies to services, including insurance and reinsurance, which vary across provinces. Each province has its own tax laws: Punjab under the Punjab Sales Tax on Services Act, Sindh under the Sindh Sales Tax on Services Act, Khyber Pakhtunkhwa (KP) under the KP Finance Act, and Balochistan under the Balochistan Sales Tax on Services Act. These differing rates, influenced by local financial needs and economic conditions, contribute to the complexity of the tax structure.

The CCP noted that certain insurance services, such as life insurance and health insurance, have been exempted from provincial sales tax for a fixed period to encourage demand. However, segments like marine insurance for exports and crop insurance remain outside the provincial tax framework. Despite these exemptions, tax is still levied on reinsurance premiums, even when the underlying insurance is exempt, leading to double taxation. This creates a tax anomaly, further exacerbated by the application of withholding tax on reinsurance commissions.

The CCP’s report indicates that these tax issues not only increase operational costs for insurers but also act as barriers to market entry and industry efficiency. 

To address these challenges, the CCP has called for better coordination between federal and provincial tax authorities, and stricter enforcement of tax exemptions where applicable.