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The Controversy Surrounding Taxation of Insurance

Duncan Muema by Duncan Muema
May 29, 2023
in News
Reading Time: 2 mins read

The Kenya Finance Bill 2023 has evoked a mixed reaction in the market, with most citizens voicing their opinions on the proposed housing levy. Another conversation regarding amendments to the Value Added Tax (VAT) Act has been gaining traction among key players in the insurance sector. The proposed amendment seeks to levy a VAT of 16% on insurance compensation. This move has sparked a heated debate among industry experts, policymakers, and business owners, all concerned about the potential consequences of such a decision.

Various stakeholders have strongly opposed the government’s plan to tax insurance payouts. Critics argue that it will discourage individuals and businesses from seeking insurance coverage, undermining the purpose of insurance as a risk management tool. Furthermore, they assert that taxing insurance payouts contradicts the fundamental principle of indemnity, where the insured party should be restored to the same financial position they were in before the loss occurred.

One key concern is the potential impact on the insurance industry. Taxing insurance payouts may lead to a decline in policy uptake, reducing the pool of funds available for insurers to cover claims. Ultimately, this would weaken the overall resilience of the economy, as adequate insurance coverage plays a vital role in promoting stability and mitigating financial risks.

Moreover, taxing insurance payouts could discourage foreign direct investment. Investors are attracted to countries with stable and transparent regulatory environments. If the proposed tax on insurance payouts is implemented, it may send a negative signal to potential investors, casting doubt on the government’s commitment to supporting businesses and protecting their interests.

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While the government aims to increase revenue through the taxation of insurance payouts, it is crucial to consider the broader implications of such a decision. Alternative measures, such as exploring additional revenue streams or improving tax collection efficiency, should be explored to ensure a balanced approach that supports economic growth without hindering the insurance industry.

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Duncan Muema

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