Ethiopia is set to implement a new decree requiring the application of value-added tax (VAT) on general insurance contracts offered by insurance companies, a move that has sparked widespread complaints from industry stakeholders. The new tax, which is expected to increase insurance premiums by 15%, raises concerns about its potential impact on the number of people eligible for insurance coverage and the overall revenue of insurance companies.

The Minister of Finance has outlined that the premiums paid for insurance will be treated as the price of the service, thus making them subject to VAT. This directive comes as part of the government’s broader strategy to increase domestic revenue amid fiscal challenges, including agreements with the International Monetary Fund (IMF) and the World Bank.

However, industry experts warn that the imposition of VAT on insurance premiums could lead to a decrease in the number of insured individuals, as higher costs may deter people from purchasing insurance. “Although VAT was applied to insured people, there is concern that it could further destabilize the sector that had not been previously focused,” said an anonymous source from the insurance sector.

Getachew Beshahwred, a seasoned consultant in the insurance industry, expressed his apprehension about the new tax, stating, “While many countries impose taxes on insurance premiums, the introduction of VAT on damage is unusual and could have negative consequences for the market.” He noted that in countries like the UK, general insurance is taxed at different rates, but the introduction of VAT in Ethiopia represents a significant shift.

The new tax is expected to exacerbate the already high cost of living for many Ethiopians, as insurance premiums rise. Getachew emphasized that the additional financial burden could lead to a decline in insurance coverage, particularly for those who are not VAT registered. “If the insurance premium increases by 15 percent, especially for individuals who do not register for VAT, the amount of compensation they receive may also decrease,” he explained.

In addition to the VAT on insurance, the Ministry of Finance has announced plans to implement a consumption-based VAT on essential services such as water and electricity, which have been exempt from VAT for the past 22 years. This move aims to alleviate the fiscal deficit but has raised concerns about its impact on low-income households.

As the government prepares to roll out these new tax measures, stakeholders in the insurance industry are calling for a reconsideration of the VAT policy to ensure that it does not undermine the sector’s stability or accessibility for the Ethiopian public. The guidelines for implementing the new tax are expected to be released in the coming days, and the industry is closely monitoring developments as they unfold.