Withholding tax on life insurance policy benefits draws flak

The decision to levy tax at the rate of 5.0 at source on the return received in excess of the premiums at maturity of life insurance policies has given rise to some complexities.
In the budget for the fiscal year (FY) 2014-15, the government, for the first time, introduced withholding tax at a rate of 5.0 per cent on monetary gains from life insurance policies.
However, financial benefits received from insurance policies were always taxable. The taxpayers were to show such benefits in their annual return as income. The National Board of Revenue (NBR) has just changed the procedure of tax collection from the insurance policy-holders alleging large-scale evasion.
But both life insurance policyholders and the life insurers have been critical of the decision to levy withholding tax on gains, if there is any, from life insurance policies.
Even a few tax officials, preferring anonymity, acknowledged that tax on life insurance policyholders is unjustified as it is not an income-generating scheme.
Moreover, questions have been raised about the deduction of this type of tax from policyholders who do not have taxable income. Getting back the tax paid so through reimbursement will be impossible on their part.    
Experts said life insurance policy-holders, in some cases, get negative return on the amount that they pay as premiums, if inflation is adjusted.
The real value of the money that the policy-holders pay as premium is largely eroded if the rates of inflation throughout the duration of the policy are adjusted.
However, successors of a deceased policyholder will not have to pay any tax on death benefits received against the insurance policy, said a recent letter of NBR, sent to the Chairman of the Insurance Development and Regulatory Authority (IDRA).
A senior tax official said profit on life insurance policies is a taxable income which never enjoyed tax-exemption.
"Since there was no tax at source, several assesses avoided it," he added.
Individual taxpayers used to show the amount with the annual income at the time of submission of tax returns.
Taxpayers can adjust the paid tax at source with the actual payable amount on their income, the official said.
"Many of the taxpayers were unaware of the tax on insurance income. To ensure proper tax collection from the sector, the government has imposed withholding tax on insurance income," he said.
Sayeedul Huq, a senior citizen, said tax on life insurance policy is completely illogical move as life insurance is more of a 'social security' tool than a profit-earning means.
"The government is unable to support the citizens due its resource constraints. This has forced people to invest in such policies," said Mr Huq, who has a life insurance policy which is scheduled to mature this year.  
Real value of money, deposited through payment of premiums for ten years, has been eroded by unabated rise in rate of inflation, he added.
"I can get double or triple amount of profits by depositing the same amount in banks instead of taking insurance policies," he said.
Insurance policy-holders deposit premium for coverage of risks, not for profit, he added.
Ahsanul Huq Titu, Vice-President of the Bangladesh Insurance Association (BIA), expressed his deep concern over the long-run adverse effect on savings and financial solvency of people.
Mr Titu, also Managing Director of Sandhani Life Insurance Limited, said mainly low-income people is the target group of life insurance policies.
"Some 90 per cent of the policy-holders deposit a nominal amount as premium in the life insurance policy," he added.
With imposition of withholding tax, the marginal income group of insurance policy-holders will be forced to pay tax despite having income below the tax threshold Tk 2,20,000.
People pay premiums against insurance policies for 'risk-coverage' or for gaining some financial solvency after a certain period of time, he added.
"Long-term savings will be discouraged with the tax measure," Mr Titu said.
The government targeted to increase contribution of insurance sector to 4.0 per cent of GDP by 2021. Such a target might be affected with the imposition of such types of tax, he added.
Dr Ahsan H Mansur, Executive Director of the Policy Research Institute (PRI), said as the government does not have any effective refund system of paid tax at source, so imposition of such withholding tax may hurt the low-income people.
"The tax is a regressive one and unfair for the people not having taxable income," he added.
Dr Mansur suggested the NBR to focus on the system of refunding to expand the net of the withholding taxes.
Industry insiders tax on insurance policies is a' disincentive' for policy-holders.
Contribution of insurance to the GDP is one of the lowest at 0.9 per cent in Bangladesh while it is 4.0 per cent in neighbouring India.
Recently, Indian Finance minister Arun Jaitley imposed 2.0 per cent tax at source on maturity proceeds of a life insurance policy if the premium paid is more than 10 per cent of the sum assured.
The tax would come into effect from October 1, 2014, Indian media reports said.
Mr Titu said gross premium rate of insurance is 5.0 per cent to 6.0 per cent in Bangladesh.  
Usually, the insurance companies pay off the final claims or liabilities of policy-holders on maturity of policies or in the event of death of the policy-holders.
Benefits of insurance in Bangladesh have not reached a large section of the population as insurance penetration remains at a very low level.
Under the existing income tax law, taxpayers can avail 15 per cent tax rebate on amount paid as premium of the life insurance policy. However, the policy- holders said they pay the premium from their tax-paid income so tax benefit on this account is nothing substantial.