Karachi, January 19, 2024 – The Federal Board of Revenue (FBR) in Pakistan has recently released the updated Income Tax Ordinance for the tax year 2024, shedding light on the tax rules applicable to the insurance industry.
The comprehensive rules outlined by the FBR specify the tax treatment for both life and general insurance businesses, aiming to provide clarity and transparency in the taxation framework.
Life Insurance Business: Separate Computation of Profits
One notable aspect of the updated rules is the segregation of profits and gains for taxpayers engaged in life insurance business. The profits under this category will be computed separately from other business income. The calculation involves determining the current year’s surplus as per the Insurance Ordinance, 2000, net of adjustments outlined in sections 22(8), 23(8), and 23(11) of the same ordinance. Expenditures eligible for deduction are specified, ensuring that only relevant expenses are considered in the calculation.
Rule 2: Surplus Computation
Rule 2 outlines the computation of the surplus for life insurance business. It addresses various scenarios, including allowances for policyholder payments, reserves for depreciation, and the treatment of profit on tax-free government securities. The rule emphasizes the exclusion of certain amounts in the first computation of surplus and provides guidelines for adjustments if reserves for policyholders cease to exist.
General Insurance: Adjustments and Exclusions
For businesses engaged in general insurance (excluding life insurance), profits and gains are determined based on the balance disclosed in annual accounts furnished to the Securities and Exchange Commission of Pakistan. Rule 5 specifies adjustments, including the exclusion of non-deductible expenditures, allowances, reserves, and provisions exceeding limits set by the Insurance Ordinance, 2000. Notably, deductions for insurance or re-insurance premiums paid to overseas entities are subject to a 5% withholding tax.
Mutual Insurance Association and Other Provisions
The rules also extend to mutual insurance associations, bringing them under the tax purview. Capital gains from specific financial instruments, dividends, and derivative products are incorporated into the income computation, subject to specified tax rates.
Provisions for Losses, Amendments, and Examination by Commissioner
Provisions such as Rule 6C address the offsetting of losses on disposal of securities against gains, ensuring no loss is carried forward to subsequent tax years. The FBR has also empowered the Commissioner to examine and amend disclosed incomes, particularly regarding commissions and claims for losses, enhancing regulatory oversight.
Applicable Sections and Definitions
Several sections, such as 4B, 4C, and 99D, are highlighted, each carrying specific implications for taxpayers under this schedule. The document concludes with essential definitions, clarifying terms like “investments,” “life insurance business,” and the role of the Securities and Exchange Commission of Pakistan.
These comprehensive rules aim to bring transparency and clarity to the taxation of insurance businesses in Pakistan, ensuring fair practices and aligning the sector with evolving financial standards. The FBR’s commitment to refining tax regulations reflects its dedication to fostering a conducive environment for businesses in the country.
