Insurance - Budget impact

Insurance – Budget Impact


Capital Gain Tax (CGT)

Exemption available to capital gains on shares of listed companies upto the tax year ending June 30, 2008 has been extended to June 30, 2010 without any change in the withholding tax and CVT regime.

Accumulated loss in case of amalgamating companies

To encourage amalgamation of banking companies, modarabas and insurance companies the facility of carry forward of “accumulated loss” is proposed to be allowed for a period of six years in the case of amalgamated or amalgamating companies.

Exemption of unrealized gains for tax purpose

Income shown as unrealized gains in the case of non life insurance companies would be excluded from the taxable income and not charged to tax.

Imposition of 5% WHT on reinsurance premium

It has been proposed that reinsurance premium paid to overseas insurance companies may be subjected to withholding tax @ 5% which would be a final tax.

Rate of FED raise on franchise

In order to meet the revenue requirements, FED rate has been enhanced from 5% to 10% on banking, insurance and franchise services.

Impact - Neutral to Positive

• It is worth mentioning that investment income constitutes a major portion of the profitability of insurance companies. With the government having granted exemption on CGT, we see insurance companies benefitting from this move.

• The facility of carryforward of accumulated loss should help encourage amalgamation in the banking sector.

• The decision to exclude income shown as unrealised gains from taxable income in the case of non-life insurance companies should bode favourably since unrealised gains contribute heavily to the bottom line of insurance companies.

• The decision to raise FED rate on insurance services will increase the cost of insurance business and henc bode negatively for the insurance sector.

• The decision to subject re-insurance premium to 5% withholding tax would not have any impact given the fact that insurance companies can pass through this cost in the form of high premiums.I