Tax probes against insurers may go on despite IRDAI’s new commission norms

Investigations by the income tax and goods and services tax authorities against 30-odd insurance companies over transactions worth more than 60,000 crore will continue despite the sector regulator announcing new rules, according to sources familiar with the matter.


Some of the companies under probe include HDFC Ergo, ICICI Lombard, and Aditya Birla Sun Life amongst others.


While the GST authority is probing them for fake input tax credit, the tax department is investigating them for alleged tax evasion by violating norms set by the Insurance Regulatory and Development Authority of India (IRDAI). Sources say both departments are probing transactions over Rs. 60,000 crore GST evasion suspected to be upward of Rs. 5,500 crore.


The regulations announced by IRDAI on payment of commission to insurance agents and expenses of management (EoM) give insurers more flexibility in managing their expenses. The rules came into effect on April 1. But since the changes are not with retrospective effect, the new regulations would not affect the ongoing cases, legal experts and tax officials said.


the ongoing investigations, which cover both life and non-life insurers, are over insurance companies allegedly using what the tax authorities describe as ‘shell companies’ to pay high commissions to agents, and allegedly accounting for these payments as marketing or advertising expenses to reduce the tax outgo.


According to a senior official privy to the probe, the norm for commission in the industry is 15%, but some of the insurers paid much more, with about 15% of that through legitimate channels and the rest through shell companies, showing expenses, he said. The liability that these companies face, including the return of wrongly claimed input tax credit, penalty and interest in the GST case itself would be around Rs. 5,000 crore, said another person privy to the development.


During the probe, both the I-T and GST departments discussed the matter with the insurance regulator. Insurance industry executives, though, said that the tax authorities had wrongly interpreted marketing and sales-related expenses as commission.

Under IRDAI’s new regulations, general insurers can utilise up to 30% of the gross premium written towards management expenses. For standalone health insurers, this can go up to 35%.


The regulator has also permitted additional expenses related to setting up branches abroad and at the International Financial Services Centre-GIFT City, among others.


In the case of life insurers, the cap on the expense of management is linked to product categories. For pure-risk products, such as regular premium tern insurance policies with a tenure of over 10 years, the ceiling will be 100% of the first-year premium and 25% of the renewal premiums in the subsequent years. For other individual categories except for pension products, the maximum limit is 80% of the first-year regular premium.


However, the new regulations will only apply in future cases, said legal experts.


“The new payment rule will not affect the ongoing probe under the GST and I-T Acts because the rule is prospective in nature and it has not been made retroactive by IRDAI,” said Ashish Kumar Singh Managing Partner; Capstone Legal.


The GST probe is in its final leg with the department planning to issue show-cause notices to those under investigation, said a person privy to the matter. “The companies under the GST probe are violative of Sections 16 and 17 (deals with input credit) and Section 155 (burden of proof). Availing fake input credit is a criminal offence hence the rule, even if amended, won’t apply retrospectively.”


In the income tax case, the expenditures claimed by the companies were disallowed for violation of IRDAI guidelines and the change in rules will not affect these cases as well, as per experts.


The investigation under the GST law will now focus only on tax evasion, said a legal expert.


“The probe will continue but as far as GST law is concerned, GST authorities can investigate the tax evasion part and not the aspect of higher payment as per the insurance regulations,” said Abhished Rastogi, founder of Rastogi Chambers, who is arguing on several cases related to credit disputes, circular trading and shell companies.


While the new rule by the IRDAI to cap commissions paid to agents is not likely to impact the ongoing investigations, it is expected to impact the profitability of large insurers as they will end up paying more commissions to lure customers. (Source: The Economic Times)

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