Life insurance is a key savings and investment vehicle available to public at large and Pakistan’s low saving and investment rate is a major reason for its underdevelopment. Pakistan is behind regional peers and world average in the critical indicator of investment to GDP ratio. While Pakistan’s investment to GDP ratio stands at less than 15% of GDP, Sri Lanka, Bangladesh and India’s investment to GDP ratio is 30% and above. In 2019, Sindh Revenue Board has made individual life insurance subject to 3% sales tax whereas group life insurance is subject to normal tax rate at 13% in Sindh. Levy of sales tax on life insurance, which should be viewed as a significant tool of savings and investment for people, besides helping in improving financial inclusion for the government of Pakistan, has seriously undermined the objectives of this sector.
Application of sales tax on this important investment vehicle proved to be counter-productive to the government’s Financial Inclusion Drive and has made savings through life insurance policies highly unattractive for the people of Pakistan. On the other hand, it forced thousands of individual policy holders to make direct investments which turned out to be costly and ineffective. It is also worth mentioning that investments in all other sectors (banks, stock markets, mutual funds etc.) does not attract sales tax. Levying sales tax on life insurance sector has jeopardized investment in the sector and will further deteriorate already low penetration of life insurance at 0.54% in Pakistan as compared to global average of 3.3%.
An important reason for low insurance penetration in Pakistan is lack of developed delivery channels, including limited access to technology. Under these circumstances, about 200,000 insurance agents in the industry play a vital role in increasing the insurance penetration. Most of these agents are lower-middle class individuals supplementing their income with meagre insurance commissions. It is worth mentioning that insurance sector is highly regulated and payment of commission is ensured after taking into account the filer and non-filer status of agents. Imposition of sales tax on agent commission has made this activity unenviable for them.
Health insurance provides a medium of social security to common individuals and its penetration as a percentage of GDP should be encouraged by all possible means so that this relief may be availed by a broad spectrum of population. Currently, health services are not taxed when availed directly whereas health insurance has been brought under the ambit of sales tax under provincial tax laws. It has temporarily been exempted from application of sales tax for a fixed period in Sindh only however this exemption could be withdrawn any time posing a challenge for the policy holders and insurance sector making health insurance unviable.
Insurance Association of Pakistan have contested this imposition of tax on every platform and have put forward various proposals for the consideration of tax authorities. As of 2020, the premium income of life insurance companies (including State Life of Pakistan) stood at PKR 231 billion. On the other hand, premium income of non-life insurance companies was recorded at PKR 102 billion. PRCL, the only reinsurer in Pakistan, recorded a premium income of PKR 17 billion. Historically, insurance along with other sectors like banking, telecommunication and airline operators was excluded from withholding tax requirement. Since insurance is a well-documented sector hence treatment applied to banking, telecommunication and airport operators should be extended to this sector as well.