Page 50 - Insurance Times May 2023

Tax probes against insurers may go on

despite IRDAI's new commission norms

nvestigations by the income tax and goods and up to 30% of the gross premium written towards
I companies over transactions worth more than 60,000 can go up to 35%. The regulator has also permitted
services tax authorities against 30-odd insurance
management expenses. For standalone health insurers, this
additional expenses related to setting up branches abroad
crore will continue despite the sector regulator
announcing new rules, according to sources familiar with the and at the International Financial Services Centre-GIFT City,
matter. among others.
Some of the companies under probe include HDFC Ergo, ICICI In the case of life insurers, the cap on the expense of
Lombard, and Aditya Birla Sun Life amongst others. While the management is linked to product categories. For pure-risk
GST authority is probing them for fake input tax credit, the products, such as regular premium tern insurance policies
tax department is investigating them for alleged tax evasion with a tenure of over 10 years, the ceiling will be 100% of
by violating norms set by the Insurance Regulatory and the first-year premium and 25% of the renewal premiums
Development Authority of India (IRDAI). Sources say both in the subsequent years. For other individual categories
departments are probing transactions over Rs. 60,000 crore except for pension products, the maximum limit is 80% of
GST evasion suspected to be upward of Rs. 5,500 crore. the first-year regular premium. However, the new
regulations will only apply in future cases, said legal experts.
The regulations announced by IRDAI on payment of
commission to insurance agents and expenses of "The new payment rule will not affect the ongoing probe
management (EoM) give insurers more flexibility in under the GST and I-T Acts because the rule is prospective
managing their expenses. The rules came into effect on April in nature and it has not been made retroactive by IRDAI,"
1. But since the changes are not with retrospective effect, said Ashish Kumar Singh Managing Partner; Capstone Legal.
the new regulations would not affect the ongoing cases,
The GST probe is in its final leg with the department
legal experts and tax officials said.
planning to issue show-cause notices to those under
the ongoing investigations, which cover both life and non- investigation, said a person privy to the matter. "The
life insurers, are over insurance companies allegedly using companies under the GST probe are violative of Sections 16
what the tax authorities describe as 'shell companies' to pay and 17 (deals with input credit) and Section 155 (burden of
high commissions to agents, and allegedly accounting for proof). Availing fake input credit is a criminal offence hence
these payments as marketing or advertising expenses to the rule, even if amended, won't apply retrospectively."
reduce the tax outgo.
In the income tax case, the expenditures claimed by the
According to a senior official privy to the probe, the norm companies were disallowed for violation of IRDAI guidelines
for commission in the industry is 15%, but some of the and the change in rules will not affect these cases as well,
insurers paid much more, with about 15% of that through as per experts. The investigation under the GST law will now
legitimate channels and the rest through shell companies, focus only on tax evasion, said a legal expert.
showing expenses, he said. The liability that these companies
"The probe will continue but as far as GST law is concerned,
face, including the return of wrongly claimed input tax
GST authorities can investigate the tax evasion part and not
credit, penalty and interest in the GST case itself would be
the aspect of higher payment as per the insurance
around Rs. 5,000 crore, said another person privy to the
regulations," said Abhished Rastogi, founder of Rastogi
development.
Chambers, who is arguing on several cases related to credit
During the probe, both the I-T and GST departments disputes, circular trading and shell companies.
discussed the matter with the insurance regulator.
While the new rule by the IRDAI to cap commissions paid
Insurance industry executives, though, said that the tax
to agents is not likely to impact the ongoing investigations,
authorities had wrongly interpreted marketing and sales-
it is expected to impact the profitability of large insurers as
related expenses as commission.
they will end up paying more commissions to lure
Under IRDAI's new regulations, general insurers can utilise customers. (Source: The Economic Times)
The Insurance Times May 2023 45