In his 2016 Budget presentation, Finance Minister Alexander Chikwanda proposed to Parliament the removal of the 16 per cent Value Added Tax (VAT) and have it replaced with an insurance levy at three per cent.
This has since taken effect from January 1 2016.
It applies to all short-term insurance policies.
The industry has for a long time been lobbying for the removal of VAT on insurance and that cry was finally heard and implemented by the Government.
What are the implications of this move to both insureds and insurers?
The insureds refer to anyone who buys insurance while insurers will refer to insurance companies and associated intermediaries.
To the insureds the effect of this development is twofold depending on
whether one is VAT registered or not.
Let me start with those who are not registered for VAT i.e.individuals and some Small to Medium Enterprises (SMEs).
The general rule of VAT requires that it is borne by the final consumer.
In this sense it is a cost to the final consumer who is not VAT registered because it simple terms it cannot be refunded.
Therefore replacing VAT with a levy is a saving of about 13 per cent. This a significant amount of money which can be used for other things.
Let us take the example of private motor third party.
The applicable premium with VAT was at K580 per year while under the new system of charging a levy it costs K515 only.
The saving in real terms is K65.
This can be used elsewhere and to those with many vehicles or insuring on comprehensive it can result into big figures.
Given the price increase of many goods and services as evidenced by the high inflation which as at December 31 2015 closed at 21 per cent, this is good news to individuals and SMEs who are not VAT registered.
They will pay less for insurance this year.
On the other hand to VAT-registered corporate entities under the previous system they were compelled to pay the VAT and later on get a refund.
There was no real cost under the VAT rules save for the administration costs associated with the entire process of administering the VAT input and output.
With the replacement of VAT in 2016 the effect is an upward cost in expenses of three percent.
However, if we consider the administration processes of first paying the VAT then apply for refunds and the like this three per cent cost of the levy is actually negligible and in some cases could be equal to the insurance levy if not more.
Going back to insurers this is by far a better system than charging VAT on insurance. Firstly its removal will generally stimulate demand for insurance by individuals and SMEs.
Secondly the administrative burdens of managing the VAT has been removed. There were instances were some clients would not pay on time yet they were issued with tax invoices.
This put pressure on insurers on finding money elsewhere to pay for the client’s VAT. Of course this is not meant to encourage paying premiums late but just to emphasize the hassles faced in administering this VAT system.
A levy is much easier to administer for insurers and it helps in the cash flow administration. The downside of it is that input VAT will no longer be claimed but if we look at the bigger picture this system offers more advantages than disadvantages.
On a rather separate note please remember to get yourself the insurance disc ahead of the implementation date which was extended to February 1, 2016.
I heard of stories where police officers were impounding some vehicles in Ndola not for failure to display an insurance disc but for failing to show proof of insurance.
This development was so fascinating because having insurance for your motor vehicle is a law that has been there way before the one requiring motorists to display an insurance disc.
Rather than being caught up in debating with the police the best and safer option one can do is to display the insurance disc and all other pertinent road certificates.
Comments:webster@picz.co.zm or webster_tj@hotmail.com or on facebook search for Insurance Talk-Zambia page or call/text 0977 857 055
(The Author is a Chartered Insurer with more than 11 years industry experience)