The insurance industry, which is now facing penal actions by tax officials for violating input tax credit rules for the goods and services tax (GST), and the finance ministry had refused to mediate in the plea made for relief in this matter. According to those with knowledge of the situation, the ministry has sent the issue to the Insurance Regulatory and Development Authority of India (IRDAI). Officials estimate that more than Rs. 2000 crore was lost to tax evasion.
In the first week of April, the industry approached the revenue department to request a lenient view of the industry-wide commission practice and to avoid treating these transactions as planned tax evasion. The industry also asked for relief from the frequent summonses and the large penalties imposed, in a letter to the government that was signed by 22 insurers and intermediaries.
They were advised to approach IRDAI if there was a problem regarding commissions after an official stated that they couldn’t interfere with the inspection.
According to a joint investigation by the Directorate General of GST Intelligence and the Income Tax department, insurance companies were going around IRDAI commission guidelines and paying agents and intermediaries more when they were selling policies using invoices that the authorities declared false.
Based on fraudulent invoices supplied by these insurance intermediaries, the tax department claims that insurance businesses availed input tax credits (ITC) without the underlying supply of goods and services.
A total of 16 insurance companies and half a dozen intermediaries have been sent notices and imposed tax demands by the DGGI.
Insurance firms defended themselves by claiming that the commissions given to intermediaries are not constant. They could be as low as 5% for some popular products, and as high as 85% for others.
The industry said that the invoices were raised in order to pay the additional commission because the commission cap imposed by the IRDAI was too low.
IRDAI said that insurance company executives who did not want to disclose their identity had not yet answered.
At a review meeting last week, officials from the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) said that the finance minister instructed them to take strict actions where there was a case for “willful default.”
Another official stated that the letters have all been issued under the law since there is a demonstrable instance of input tax credit fraud and we have all the data to support the claim.
Asking about the issue on an earnings call on April 26, Niraj Shah, the CFO of HDFC Life Insurance stated that it is an “industry-wide issue” and that information regarding the deductions used for the input tax credit had been requested that have been provided on the input tax credit.
The company has been working with the authorities and providing them with any required data.
They are waiting to hear regarding a formal show cause notice, he continued.