Insurance Business Chapter- 25
if it appears to the CIR, after consultation with the Securities and Exchange Commission of Pakistan
(SECP), that the rate of profit on debt or other factors employed in determining the liability in respect
of outstanding policies is inconsistent with the valuation of investments so as artificially to reduce the
surplus, the CIR may make such adjustment to the allowance for depreciation, or in respect of
appreciation, of such investment as the CIR thinks reasonableThe term investment is defined in the following manner:
"investments " includes all forms of shares, debentures, bonds, deposits and other securities, derivative
instruments, and includes immovable property whether or not occupied by the insurer;
In view of the aforesaid provision of the schedule, it clearly transpires that gain / loss due to appreciation /
diminution in the value of shares is allowable deduction for the insurance business. The said rules further
states that:
(b) profit on debt accrued in the inter-valuation period in respect of any securities of the FG which have
been issued or declared to be income tax-free shall not be excluded, but shall be exempt from tax.
Rule 6A states that the capital gains on the sale of shares etc. shall not be included in the taxable income
of the an insurance company
In computing income under this Schedule, there shall not be included “capital gains ”, being income from
the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies
Ordinance, 1984, listed on any stock exchange in Pakistan or shares of a public company (as defined in
section2(47) and the PTC issued by the Government of Pakistan, derived up to tax year ending on the
thirtieth day of June, 2010.
General insurance
Rule 5 of the Fourth Schedule deals with the General Insurance Business. The said Rule states that:
The profits and gains of any business of insurance (other than life insurance) shall be taken to be the
balance of the profits disclosed by the annual accounts required under the Insurance Ordinance, 2000, to
be furnished to the Securities and Exchange Commission of Pakistan (SECP) subject to the following
adjustments:
(a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any
tax deducted at source from dividends or profit on debt received which is not deductible in computing
the income chargeable under the head “Income from Business ” shall be excluded;
(b) subject to the provisions of rule 6A, any amount of investment written off shall be allowed as a
deduction, but any amount taken to reserve to meet depreciation of investments shall not be allowed
as a deduction, and any sums taken credit for in the accounts on account of appreciation of
investment shall not be treated as part of the profits and gains, unless these have been crystallized
as gains or losses on the realization of investments; and
(c) no Reduction shall be allowed for any expenditure, allowance, reserve, or provision in excess of the
limits laid down in the Insurance Ordinance, 2000, unless the excess is allowed by the Securities and
Exchange Commission of Pakistan (SECP) and is incurred in deriving income chargeable to tax; and
(d) no deduction shall be allowed for any expenditure incurred on account of insurance premium or re-
insurance premium paid to an overseas insurance or reinsurance company or a local agent of an
overseas insurance company until tax at the rate of 5% is withheld on the gross amount of insurance
or re-insurance premium.
Although simple manner of computation of tax on income of Insurance companies is to apply applicable
rate to the accounting profit of the company irrespective of the fact what are the components of the income
and what are their respective classification. No estimation / additions u/s 21, 22, 23, 24 or otherwise can be
made except for provisions and reserves which are inadmissible under the law e.g. provision for bad debts,
etc.
Mutual insurance association
Rule 6: These rules shall also apply to the assessment of the profits and gains of any business of
insurance carried on by a mutual insurance association and such profits and gains shall be chargeable to
tax under head "Income from Business".