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18% VAT likely to hurt Uganda’s insurance growth

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. 

“At 0.65% Uganda’s insurance penetration is one of the lowest in the world. The introduction of an additional 18% cost as VAT on insurance will further depress this low rate that has stagnated for the last five years.”

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. 

Government’s stand
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.

Insurers’ view
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. 

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