Insurance players who have been in a stagnant sector over the years will have to brace themselves for tougher times as government scraps tax exemptions on insurance products.
This follows the introduction of an additional 18 per cent cost as Value Added Tax (VAT) on insurance products that may discourage people from buying covers.
In the past, the sector has been enjoying products free from VAT which government has scrapped in the financial year 2014/2015.
At 0.65 per cent, Uganda’s insurance penetration is one of the lowest in the world. With the government looking for every prospect to bring money into the Treasury coffers amid donor cuts, the insurance sector, has been deemed fit to contribute to the largely home funded Budget.
Currently, in addition to stamp duty, clients also pay an insurance training levy of 0.5 per cent of gross premium on insurance policies.
Insurance premium will now be taxed in excess of 20 per cent. That is to say VAT of 18 per cent, an insurance training levy of 0.5 per cent, the Insurance Regulatory Authority levy of 1.5 per cent and stamp duty of Shs35,000 for those buying general insurance products.
The government’s move to scrap tax exemption is viewed by the Chief Executive Officer of Uganda Insurers Association, Ms Miriam Magala, as a move that will cripple the sector’s growth since insurance product buyers are already burdened with taxes introduced in the financial year 2013/4.
“As you will appreciate, the recent increment in stamp duty from Shs5,000 to Shs35,000 in 2013 significantly increased the cost of insurance and negatively affected the uptake of insurance services. The quick imposition of VAT in 2014 will further increase the final cost borne by a consumer who is still grappling with the significantly increased cost to begin with,” Ms Magala said.
However, finance spokesperson Jim Mugunga, in an e-mail to Prosper magazine, said government scrapped tax exemptions across sectors and insurance is not exceptional.
“The government removed tax exemptions last year across sectors and not necessarily targeted at only insurance. This policy, unless revoked, remains operational because we believe that exemptions had served the purpose for which they were initially allowed but it was also intended to curtail associated abuse,” Mr Mugunga said.
He added that the sector’s growth is not affected by taxes but other issues.
“No country worldwide has exempted the insurance sector from paying taxes. My take is that the insurance sector growth is impacted by the level of prudent industry practice through a formidable regulatory framework and to this end, government has ensured that we are on course.”
Mr Mugunga instead advised insurance players to put their house in order by considering “other factors [such as] education, awareness and most importantly; a clear and proactive claims settlement policy” which will translate into sector growth.
Early last month, the International Monetary Fund (IMF) asked the government to review taxes in the 2014/15 Budget by removing tax exemptions which they said undermine growth as a measure to boost the declining tax revenue collections.
The IMF chief to Uganda, Ms Ana Lucía Coronel, in a pre-Budget statement said: “The IMF strongly encourages the government to take decisive action to increase tax revenue collections. This would involve reviewing existing tax laws and eliminating tax exemptions that have little benefit for production but undermine growth, enhancing spending and constrain vibrant private sector growth.”
The insurers argue that although government has to find avenues to collect revenue, sectors like theirs, which still have low penetration levels, should have been informed prior to the tax adjustments and given a year of transition.
“The time frame within which this second tax has been introduced does not give any room for the sector to adjust to the effects of stamp duty, which caused a decline in the uptake of insurance,” Mr Maurice Amogola, the chairman of Uganda Association of Insurance Brokers, said.
During the Budget reading, Finance Minister Maria Kiwanuka said in the 2013/2014 Budget, insurance gross insurance premiums rose to Shs457 billion, translating into a 30 per cent annual growth and about eight insurance companies offered agricultural insurance products.
Mr Amogola says the impact of these taxes will be particularly felt by personal lines that include the social protection insurances like workers compensation and motor third party insurance, micro insurance, agriculture and loan protection which would remain affordable to the majority poor.
Ms Mariam Nalunkuuma, the Insurance Regulatory Authority spokesperson, said they are engaging both the Finance minister and parliamentarians to repeal the new taxes.
“We are engaging the minister and MPs to consider repealing these new taxes because insurance will become very expensive,” she said.
taxes hurting those in the insurance industry
Percentage of a training levy provided for in the Insurance Amendment Act 2011 that is imposed on the gross direct premium charged for all policies issued by insurance companies.
Value Added Tax imposed on insurance products in the 2014/15 Budget..
Stamp duty imposed on whoever buys general insurance products