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No tax withholding is necessary for payments that represent discounts or inter-company account settlements.

 

You don’t need to deduct any taxes from payments related to discounts and settling accounts between different companies: Lahore Punjab

Tax practitioners have raised concerns about assessing officers in the tax department incorrectly imposing tax liability based on a flawed understanding that deductions were necessary even when payments were made through book adjustments to co-insurers or parties involved in an insurance agreement.

Typically, insurance services are provided collectively by several insurance companies who form a consortium under an agreement to serve the client or insured party. The premium is collected from the insured party by the lead insurer and then distributed among the insurance companies in proportion to the risks they undertake.

According to our sources, it is the responsibility of the lead insurer to ensure that advance tax is deducted from payments made to the commission agent. The lead insurer receives the insurance premium in full and subsequently allocates the remainder among the co-insurers, after deducting any required taxes, based on their agreed-upon shares.

It should be noted that the co-insurers and their respective shares of the risk are determined through an agreement. The co-insurance agreement primarily serves as a general framework for sharing the risk and premium associated with an insurance policy. Importantly, all necessary taxes on the insurance premium and payments to commission agents are already deducted at the time of receipt/payment by the lead insurer.

In cases where there is any failure to deduct taxes from payments made to the agent, it is recommended that the tax department investigate the lead/co-insurers regarding the disputed transactions. The co-insurers who have not made direct payments to the commission agents should not be subject to such inquiries, as they are not directly involved in these transactions.

At most, as per our sources, the tax department can verify whether withholding taxes have been appropriately applied by the lead/co-insurers in disputed transactions. If any non-deduction is identified, appropriate legal proceedings should be initiated against the lead insurers in accordance with the law.