Insurance companies under scanner for rampant tax evasion

Central Board of Direct Taxes chairman Nitin Gupta speaks to the media in New Delhi on February 3, 2023.
| Photo Credit: ANI

The Income Tax Department is likely to start prosecuting insurance companies soon, as it has found rampant industry-wide irregularities and “tax evasion” in the commission payments made to agents while bypassing norms laid down by the insurance regulator, India’s direct tax department head said.

“Only 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,” Central Board of Direct Taxes (CBDT) chairperson Nitin Gupta told The Hindu.

“We 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,” he explained.

‘Not holy cows’

Asked if prosecutions were underway in these cases, Mr. Gupta said: “We will initiate whatever action is needed but it is rampant the way they have flouted the law. It’s not that they are holy cows.”

The IT department’s 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 ₹824 crore.

While the Insurance Regulatory and Development Authority permits only nominal commissions to corporate insurance agents, the indirect tax department’s 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 ₹217 crore of that ₹824 crore amount “voluntarily” to the GST kitty.

‘Won’t affect average taxpayer’

The CBDT chief said that the Budget decision to tax those purchasing life insurance policies with an annual premium of over ₹5 lakh would not hit the “average taxpayer” as such policies are only taken by “the rich or super-rich”. It will also not cover pure term insurance policies that only provide death benefits, he said.

“Now, if tomorrow, a life insurance firm comes with an innovative plan or product and says we don’t know how much is for term cover and how much is for the endowment part, then we can’t help it… But be simple and try to comply with the law — that is our message to the life insurance companies as well,” 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 Policies’ premiums was capped at ₹2.5 lakh in the Finance Act of 2021.

“All other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable,” the explanatory memorandum of this year’s Finance Bill says, noting that the changes are being made “to curb such misuse”.