The insurance sector in Pakistan provides risk mitigation, financial protection, and long-term savings to individuals, businesses, and institutions. Like all regulated industries, insurance companies are subject to various tax laws, which govern their corporate income, premium receipts, commissions, and services. The taxation of insurance services in Pakistan involves both federal and provincial authorities, with distinct rules for different types of insurance businesses. This article provides a comprehensive overview of the tax framework applicable to insurance companies in Pakistan, including income tax, sales tax, federal excise duty, and withholding obligations.

Regulatory Framework Governing Insurance Taxation

The taxation of insurance services in Pakistan is governed by the following legal instruments:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Federal Excise Act, 2005

• Provincial Sales Tax on Services Acts:

  • Punjab Sales Tax on Services Act, 2012

  • Sindh Sales Tax on Services Act, 2011

  • KP Finance Act, 2013

  • Balochistan Sales Tax on Services Act, 2015

• Insurance Ordinance, 2000

• SECP Rules and Insurance Accounting Regulations

The Securities and Exchange Commission of Pakistan (SECP) is the main regulatory body for insurance companies, while the Federal Board of Revenue (FBR) and Provincial Revenue Authorities oversee taxation.

Types of Insurance Companies and Their Tax Treatments

The taxation of an insurance company depends on its classification:

1. Life Insurance Companies
Provide long-term policies such as term life, endowment, annuities, and unit-linked insurance.

2. General Insurance Companies (Non-Life)
Offer short-term coverage like motor, fire, health, marine, travel, and liability insurance.

3. Takaful Operators
Provide Shariah-compliant insurance products through family (life) or general (non-life) takaful.

4. Reinsurance Companies
Offer insurance to other insurers to manage risk exposure.

Each has unique taxation structures based on policyholder and shareholder fund treatment.

Income Tax on Insurance Companies

Insurance companies are taxed under specific rules provided in the Fourth Schedule to the Income Tax Ordinance, 2001.

General Insurance Companies

• Taxed on profit before tax, determined by deducting allowable expenses from underwriting income.

• Tax Rate (2025): 29% (standard corporate rate).

• Underwriting Income includes:

  • Net premium earned

  • Commission received

  • Claims recovered

  • Investment income

• Expenses Deductible:

  • Management expenses

  • Claims paid

  • Reinsurance premiums

  • Commission to agents

• Unexpired risk reserves are allowed on a prescribed formula basis.

Life Insurance Companies

• Taxed only on shareholder income, not on the policyholder fund.

• Premium income, investment returns, and reserves related to policyholders are not taxable.

• Shareholder fund income (commissions, investment returns) is taxed at 29%.

• Unit-linked insurance plans may attract tax depending on structure.

Takaful Operators

• Taxed under Takaful Rules, 2012 and the Income Tax Ordinance, using:

  • Separate accounting for Participant Takaful Fund (PTF) and Operator Fund (OF)

  • Only income from Operator Fund is taxed at 29%

  • Surplus or deficit in PTF is not taxable

Reinsurance Companies

• Taxed as general insurance companies on profit earned from reinsurance premium and investment income.

Minimum Tax under Section 113

If an insurance company’s tax payable is less than 1.25% of its turnover, minimum tax under Section 113 may apply. However, life insurance companies are exempt from Section 113.

Sales Tax and Federal Excise Duty (FED) on Insurance Services

Insurance services in Pakistan are primarily taxed under Federal Excise Duty (FED) and Provincial Sales Tax on Services, depending on the nature of the policy and the insurer’s location.

Taxable Insurance Services

• Motor Insurance

• Fire and Property Insurance

• Health Insurance (if not exempt)

• Marine and Cargo Insurance

• Travel Insurance

• Engineering and Miscellaneous Insurance

Life insurance policies and reinsurance services are generally exempt from sales tax and FED.

Sales Tax Compliance

Insurance companies must:

• Register with the respective provincial authority (e.g., PRA, SRB)

• File monthly sales tax returns

• Charge tax on premium receipts for taxable services

• Deposit sales tax by the 15th of the following month

• Claim input tax where allowed (on advertising, administrative expenses)

In cases where a company operates across multiple provinces, tax is payable in the province where the service recipient resides.

FED Compliance

For insurers operating in Islamabad Capital Territory, FED at 16% is levied under Federal Excise Act, 2005. The company must:

• File STR-7 return monthly via FBR’s IRIS or eFBR system

• Maintain invoice-level data for FED-exempt and taxable services

• Deposit FED by the 15th of the following month

Withholding Tax Obligations

Insurance companies are significant withholding tax agents under the Income Tax Ordinance, 2001. Key responsibilities include:

Withheld taxes must be deposited by the 7th of the next month, and withholding statements (monthly and annual) must be filed through FBR’s IRIS system.

Taxation of Insurance Agents and Brokers

Agents and brokers earn commission-based income from insurance sales. They are subject to:

• Withholding tax under Section 233 at 12% (final tax for non-corporates)

• Sales tax registration if they earn above the prescribed threshold

• Filing of annual tax return with FBR

• No deduction allowed for expenses unless opted for normal tax regime

SECP also regulates agents and requires annual license renewals.

Tax Filing Requirements for Insurance Companies

Late filing or non-compliance leads to penalties, interest, and audit notices.

Tax Incentives for Insurance Companies

Although the industry is heavily taxed, the following incentives and exemptions are available:

• Life insurance premium income is exempt from sales tax and often from FED

• Reinsurance premiums are generally exempt from tax

• Investment income of policyholder fund in life insurance is not taxed

• Capital gains on securities held by insurance companies are taxed at reduced rates

• Expense deductions for advertising, staff training, software, and technology upgrades

• Depreciation and amortization on IT infrastructure

Taxation of Islamic (Takaful) Insurance

Takaful operators follow the same tax principles with key distinctions:

• Operator Fund (OF) is taxed at 29%

• Participant Takaful Fund (PTF) is not taxed

• Wakala fee is recognized as taxable income

• Qard-e-Hasna, surplus distribution, and PTF investments are not taxed unless transferred to OF

• SECP mandates Shariah audit reports, but the tax treatment remains under the standard framework

Common Audit and Dispute Areas

Insurance companies often face tax disputes in areas such as:

• Classification of taxable vs exempt services

• Disallowance of expenses related to exempt activities

• Input tax adjustment issues

• Underreporting of investment income

• Withholding tax defaults on commission payouts

• Mismatches between sales tax and income tax returns

Engaging qualified tax professionals and ensuring reconciliations across all tax returns is essential.

Best Practices for Insurance Tax Compliance

• Maintain separate ledgers for taxable and exempt services

• Regularly reconcile premium records with tax returns

• Automate tax deduction and deposit processes

• File returns and statements before due dates

• Conduct internal tax audits quarterly

• Stay updated with SROs, provincial circulars, and budget amendments

• Train finance staff on tax reporting and withholding obligations

Conclusion

Taxation of insurance services in Pakistan is governed by a combination of federal and provincial laws covering income tax, sales tax, FED, and withholding requirements. Life and general insurance companies have distinct rules regarding tax treatment of premium income, investment returns, commissions, and fund segregation. With growing scrutiny from tax authorities and evolving digital operations, insurers must ensure strong compliance frameworks, timely filings, and accurate tax reporting. A strategic tax management approach can help insurers improve financial efficiency, reduce litigation risks, and contribute effectively to Pakistan’s financial and social security ecosystem.