A probe found that insurance firms were circumventing IRDA norms to pay more to NBFCs cross-selling insurance policies, by securing fake invoices, claiming ineligible tax credits worth Rs. 824 crore.
NEW DELHI: The Income Tax Department is likely to start prosecuting insurance companies soon. As the department has found rampant industry-wide irregularities and โtax evasionโ in the commission payments made to agents while bypassing norms laid down by the insurance regulator, Indiaโs direct tax department head said.
โOnly recently, we mounted some actions and found a lot of irregularities in the way they were paying commission. All the insurance companies, be it any insurance company you name,โ Central Board of Direct Taxes (CBDT) chairperson Nitin Gupta said.
โWe have come out with [findings of] rampant tax evasion and avoidance of the measures in a way to overcome the limits laid by the regulatory authority. And because you are bypassing the law laid down by the regulatory authority, that expenditure is impermissible under the Income Tax Act as well,โ he explained.
โNot holy cowsโ
Asked if prosecutions were underway in these cases, Gupta said: โWe will initiate whatever action is needed but it is rampant the way they have flouted the law. Itโs not that they are holy cows.โ
The IT departmentโs findings can be linked to a probe launched by the Directorate General of Goods and Services Tax (GST) Intelligence in 2022, investigating 16 insurance companies for availing ineligible input tax credits amounting to Rs. 824 crore.
While the Insurance Regulatory and Development Authority permits only nominal commissions to corporate insurance agents. The indirect tax departmentโs probe found that firms were circumventing these norms to pay more to corporate agents such as non-banking financial companies engaged in micro financing businesses. These firms were cross-selling their insurance policies in the course of their lending business.
Their modus operandi to pay higher commissions involved securing invoices from intermediaries for supply of services such as web marketing and advertising, without any such services actually being provided. By September 30, 2022, the companies had remitted Rs. 217 crore of that Rs. 824 crore amount โvoluntarilyโ to the GST kitty.
โWonโt affect average taxpayerโ
The CBDT chief said that the Budget decision to tax those purchasing life insurance policies with an annual premium of over Rs. 5 lakh would not hit the โaverage taxpayerโ as such policies are only taken by โthe rich or super-richโ. It will also not cover pure term insurance policies that only provide death benefits, he said.
โNow, if tomorrow, a life insurance firm comes with an innovative plan or product and says we donโt know how much is for term cover and how much is for the endowment part, then we canโt help itโฆ But be simple and try to comply with the law โ that is our message to the life insurance companies as well,โ Mr. Gupta underlined.
His remarks assume significance as the insurance industry had launched a gamut of new products after tax exemptions on Unit Linked Insurance Policiesโ premiums was capped at Rs. 2.5 lakh in the Finance Act of 2021.
โAll other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable,โ the explanatory memorandum of this yearโs Finance Bill says, noting that the changes are being made โto curb such misuseโ.
