Insurance companies will pass 17.5 % VAT charge to clients

The insurance industry is grumbling over the imposition of a 17.5 per cent Valued Added Tax (VAT) on its services, which it says will worsen the already low insurance penetration in the country.

Though life insurance and reinsurance services are exempted, insurers doing general business such as providing cover for vehicles and logistics are worried about having to increase their premiums due to the VAT.

The government amended the VAT law last November and expanded its scope by raising the tax rate from 15 per cent (including the National Health Insurance Levy) to 17.5 per cent effective January 2014.

The decision to levy a 17.5 per cent on financial services has generated a huge scare among the public with reported cases of panic withdrawal by bank customers.

The Chief Executive Officer of the Ghana Insurers Association (GIA), Mr Atsu Menyawovor, is worried that the imposition of the tax on insurance will raise the insurance premiums, which will eventually be passed on to the consumer.

Like the banks, he is also worried that the many businesses which already do not insure their capital and property will not be encouraged to do so because of the rise in premiums.

“We will most likely pass on the VAT charged on the premiums to the final consumer,” he said.

Mr Menyawovor feared that the implementation of the 17.5 per cent VAT on insurance premiums on the compulsory motor insurance would have a rippling effect on the travelling public.

“This is because when motor insurance goes up, it is likely that the transport unions will adjust transport fares accordingly to reflect the increment, and that will impact on the cost of transportation and food among other things,” he noted.

“Insurance has an elastic demand and we have very low insurance penetration rate in this country. We are now trying to get people to buy non­life insurance products because we believe that if people insure their own assets, in the event of any misfortune, they can be compensated adequately instead of appealing to government for help; a situation which would create a social burden for the state.

“A couple of years back when we attempted adjusting motor insurance premiums moderately, the government intervened and stopped us,” he said.

“In fact, this will be an additional strain on individuals and businesses trying to comply with the laws that mandate them to buy or provide insurance.

“So the effect of the VAT will be significant for people buying insurance. We are in essence taking away people’s capital because insurance is a mechanism for protecting capital, which is an asset people use to work, so that in the event something happens to that capital, one can get insurance or have the asset replaced for work to go on.

Concerns of insurance industry Though the industry has up to September to begin the implementation of the new tax regime, some other insurance practitioners who pleaded anonymity told the Graphic Business in an interview that the tax would weaken the financial standing of both the insured and the insurer to do business at a time that insurance penetration was low.

“Of course, insurers have not been prepared for this because we need to do a lot of education and reconfigure our computer systems – so we need to actually engage the tax authorities to seek clarification and also find the best way to implement this without creating any upheavals in the system.

There are yet others who are uncertain of whether the tax applies to premiums or intermediary services or brokers who work on commission basis.

Meeting the GIA team Meanwhile, a deputy Minister of Finance, Mr Cassiel Ato Forson, in an interview, said the government planned to meet the national executives of the GIA to thrasnbut all issues arising out of the implementation of the 17.5 per cent on VAT.

The new VAT law puts Ghana among only a few countries in the world that charge a consumption tax on insurance at a time the industry is struggling to expand. Currently, insurance penetration in the country is less than two per cent in a market operated by 43 firms in both the life and non-life insurance sectors.

For the government, the VAT hike seems an easy way to boost revenues to keep its fiscal stabilisation plans on track since it would not be able to cut the budget deficit of 11.8 per cent of GDP as quickly as it had anticipated.

It now forecasts a deficit of 8.5 per cent of GDP this year, up from 8 per cent previously projected

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