Taxation of insurance services in Pakistan is governed by the Federal Board of Revenue (FBR) and is subject to both federal and provincial taxes. Insurance services are taxed under the Sales Tax Act, 1990, and the Income Tax Ordinance, 2001. The taxation regime for insurance services in Pakistan is complex and varies depending on the type of insurance and the nature of the transaction. In this article, we will discuss the taxation of insurance services in Pakistan in detail, including definitions, examples, and case studies.
Definition of Insurance Services:
Insurance services in Pakistan are defined as the provision of insurance coverage against risk or loss by an insurer to an insured party in exchange for a premium. Insurance services cover a wide range of risks, including life insurance, health insurance, property insurance, and liability insurance.
Sales Tax on Insurance Services:
Sales tax on insurance services is governed by the Sales Tax Act, 1990. According to this act, all insurance services in Pakistan are subject to a standard sales tax rate of 17%. This includes both general insurance and life insurance policies.
Example:
Suppose a person purchases a life insurance policy with an annual premium of PKR 50,000. The insurer will charge a sales tax of 17% on the premium, which amounts to PKR 8,500. The total premium paid by the insured will be PKR 58,500 (PKR 50,000 + PKR 8,500).
Income Tax on Insurance Services:
Income tax on insurance services in Pakistan is governed by the Income Tax Ordinance, 2001. Under this ordinance, insurance services are treated as taxable income and are subject to income tax. The tax rate varies depending on the type of insurance and the nature of the transaction.
For life insurance policies, the tax rate is based on the policyholder’s age and the sum assured. The tax rate is higher for policies with higher sums assured and for policyholders who are over the age of 40.
For general insurance policies, the tax rate is calculated based on the premium paid. The tax rate is higher for policies with higher premiums.
Example:
Suppose a person purchases a life insurance policy with a sum assured of PKR 1 million. The policyholder is 35 years old, and the annual premium is PKR 50,000. The tax rate on this policy will be 1% of the sum assured and 2% of the premium. Therefore, the total tax payable will be PKR 10,000 (1% of PKR 1 million) + PKR 1,000 (2% of PKR 50,000) = PKR 11,000.
Case Study:
In 2020, the FBR conducted an audit of a leading insurance company in Pakistan. The audit revealed that the company had not paid the correct amount of sales tax on its insurance services. The company was charging a sales tax rate of 16% on its insurance premiums, whereas the correct rate was 17%. As a result, the company was asked to pay PKR 150 million in sales tax arrears.
Conclusion:
In conclusion, taxation of insurance services in Pakistan is subject to both federal and provincial taxes. Insurance services are taxed under the Sales Tax Act, 1990, and the Income Tax Ordinance, 2001. The tax regime is complex and varies depending on the type of insurance and the nature of the transaction. It is essential for insurance companies and policyholders to understand the taxation rules to avoid penalties and ensure compliance with the law.
