Department of Accounting & Information Systems
A term paper on “Income tax calculation procedure of life insurance companies as per Income Tax Ordinance 1984”
Dhiman Kumar Chowdhury
Dept. of Accounting & Information Systems
University of Dhaka
Md. Afzal Hossain
BBA 12th Batch
Date of Submission: 22 August 2010.
It is a common knowledge that the true profit of insurance business cannot correctly be determined under the ordinary method of accounting. In life insurance the revenue account would serve only to indicate the savings of the year represented by the excess of the current year’s income over the expenditure and the balance sheet would disclose the nature of the securities and other assets held by the company as also its liabilities (exclusive of the company’s current liability on all the policies in force) at each balancing time. The reason is that the company receives money by way of premiums from year to year and promises to pay in exchange a lump sum represented by the face value of the policies in certain events happening in the future, and consequently, the savings of any year can not by any means be regarded as the year’s profit.
Because of this reason the Income Tax Ordinance 1984 has provided a special method of computing the profits of a company doing insurance business. By virtue of section 28(2) (a) the assessment of insurance company is completely governed by the rules contained in the Fourth Schedule to the Ordinance. Therefore, the following provisions are implicitly excluded while computing the profits of an insurance company:
Section 22: Interest on Securities
Section 23: Deductions from interest on Securities
Section 24: Income from House Property
Section 25: Deduction from income from house property
Section 28: Income from Business or Profession
Section 30: Deduction not admissible in certain circumstances
Section 31: Capital Gain
Section 32: Computation of Capital Gain
Section 33: Income from Other Sources
Section 34: Deduction from income from other sources
Section 62: Credit of tax deducted or collected at source
Thus the profit and gains of insurance business from all sources are to be computed artificially as one income in accordance with the provisions in the under Fourth Schedule of Income Tax Ordinance 1984 and not under different heads of income.
Computation of the Profit and Gains of Life Insurance Business According to Fourth Schedule
1. Profit of life insurance business to be computed separately: In the case of any person or company who carries on life insurance business at any time in the income year, the profit and gains of such person or company from that business shall be computed separately from his income, profit or gains from any other business.
2. Computation of Profits and Gains of Life Insurance Business: The profits and gains of life insurance business other than pension and annuity business shall be taken as the greater of the following:
(a)Net External Incomings: Net external incomings can be computed by subtracting the management expenses of that year from the gross external incomings of the income year from that business.
(b)Annual Average Surplus: The annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation in respect of the last inter valuation period ending before the commencement of the assessment year subject to the following exclusion:
i.Any surplus or deficit included therein which was made in any earlier inter valuation period, and
ii.Any expenditure or allowance which is not deductible under the provision of Section 29 and Section 30 in computing income chargeable under the head “Income from Business or Profession”.
Here it should be noticed that the assessable profits under the first method...