Sri Lanka: New tax law pressures insurers
Source: Asia Insurance Review | Nov 2017
Sri Lankan insurance companies are likely to face higher tax expenses under a new Inland Revenue Act, that was passed by Parliament last month and that will take effect next 1 April.
Insurers will be liable to pay tax on surpluses transferred to shareholders and to policyholders.
Under the current law, the taxable profit of a life insurance company are calculated by deducting the management expenses such as claims, administrative expenses, agents’ commissions and finance costs from investment income.
However, under the new law, the taxable profit of a life insurer will include the “surplus attributable to shareholders generated from premium”, in addition to the excess of investment income over management expenses, resulting in a higher taxable profit.
Life policyholders will be taxed 14%
According to LOLC Securities, which analysed the tax impact on life insurers’ profitability, the higher taxes will have the hardest effect on new and mid-tier life insurers.
The stockbroking firm also said that life insurance products would also become less attractive as under the new Act, the policyholders will be taxed at 14% on bonuses and dividends issued to them by insurers for the first three years. On the other hand, interest earned on bank deposits will attract tax of 5%.
At the same time, the restriction (35% of statutory income) on deduction of losses by life insurers has been removed under the new tax law and can now be claimed in full, but can be carried forward only for six years instead of an indefinite period previously. A