ISLAMABAD: The Competition Commission of Pakistan (CCP) has called on the Federal Board of Revenue (FBR) to address tax anomalies in the insurance industry.
According to a recent CCP report, the current tax structure creates undue burdens on insurers, particularly at the reinsurance stage.
The report highlights that while policyholders pay provincial sales tax on insurance premiums, insurers bear the tax burden on reinsurance premiums. This results in double taxation, as the same premium is taxed twice - once when the policy is issued and again when the insurer procures reinsurance services. Furthermore, some insurance types exempt from sales tax, such as life and health insurance, are still subject to tax on reinsurance, exacerbating the issue.
These tax anomalies increase the cost of doing business for insurers, ultimately affecting consumers. The CCP emphasizes the need for rationalizing taxes and duties to create a more equitable environment for the industry.
The insurance sector in Pakistan faces additional challenges, including low insurance penetration. Only 3% of vehicles on the road have third-party insurance, despite it being mandatory under the Motor Vehicles Act of 1939. The CCP attributes this low rate to a lack of awareness, inadequate enforcement, and the absence of a centralized database for verifying insurance coverage.
The CCP also pointed out other issues hindering the growth of the insurance industry. For instance, a 1% Federal Insurance Fee imposed on non-life insurance policies in 1989 has not been utilized for its intended purpose of raising awareness about insurance. Instead, it adds an extra cost burden on non-life insurers. The report suggests abolishing preferential treatment granted to certain state-owned insurers to ensure a level playing field for all market participants.
Moreover, the CCP recommends amending the Insurance Ordinance of 2000 to allow private insurers to compete with state-owned entities in the public property insurance market. This would likely lead to better market outcomes and increased competition. The report also calls for amending Rule 18 of the Insurance Rules 2017, allowing insurers to choose between domestic and foreign reinsurers freely, which would further enhance market efficiency.
Regarding bancassurance - the distribution of insurance products through banks - the CCP suggests that the State Bank of Pakistan issue guidelines to prevent restrictive practices and ensure customers receive genuine benefits. Strict regulations should be put in place to prevent misleading sales practices and ensure that insurance terms and conditions are clearly communicated to customers. In cases of disputes or breaches of agreement, the CCP recommends resolving jurisdictional conflicts between the Federal Insurance Ombudsman and the Banking Ombudsman through better coordination.
The CCP's recommendations aim to create a more competitive and efficient insurance market in Pakistan. By addressing tax anomalies, enhancing regulatory frameworks, and promoting fair competition, the insurance industry can expand its reach and provide better services to the public. The CCP's efforts to rationalize taxes and duties and improve market dynamics are expected to contribute significantly to the industry's growth and development.
