Exclusive: Insurance firms and tax authorities to fight in court over "commission" paid to agents

 Exclusive: Insurance firms and tax authorities to fight in court over "commission" paid to agents

Exclusive: Insurance firms and tax authorities to fight in court over "commission" paid to agents

Insurance companies could try to defend them as marketing costs, but because this is a factual disagreement, tax officials are certain that they have the upper hand.

Tax demands are aimed at insurance firms, service providers, and middlemen within the industry.

You can be required by some insurance providers to get coverage. This is a result of their ongoing legal battle with the tax authorities over alleged overpayment of commission to the agents.

According to three persons with knowledge of the situation, tax authorities are certain that they have the upper hand since this is a factual disagreement rather than an interpretation one, despite insurers' attempts to defend them as marketing expenditures.

According to the tax department, 15 insurance firms have avoided paying Rs 2,350 crore in goods and services tax (GST) to far. These businesses include Aditya Birla Sun Life Insurance, HDFC Life Insurance, Bajaj Allianz, and several of their public sector counterparts. On June 23, HDFC Life said that the Directorate General of GST Intelligence (DGGI) had sent company a show-cause notice, requesting that it pay Rs 942 crore in unpaid taxes covering the months of July 2017 through FY22. It is anticipated that other insurance businesses under suspicion would shortly get letters of GST avoidance.

Demand notifications are being sent out by the Central Board of Direct Taxes (CBDT), which is also looking into possible tax fraud by insurance businesses.

"Yes, the insurance firms plan to pursue legal action under both the direct tax notice and GST laws. The insurance industry will voice its opinion. While the tax authorities are contesting this claim and asserting that they have paid extra commission, they maintain that they have paid for some marketing services. Each insurance company's tax notifications must be challenged on an individual basis. This is a debate over facts, according to a source with knowledge of the situation.

Tax demands are aimed at insurance firms, service providers, and middlemen within the industry. The additional commission that the tax department claims was given to agents and intermediaries over the cap established by the Insurance Regulatory and Development Authority of India (IRDAI) is the subject of the whole issue. Tax authorities are looking into the possibility that the commission was paid for under false pretenses.

GST notifications were given since no marketing costs were spent. Evidence exists. It turns into a 'Commission' undercover. The facts, not the law, will govern this case. The GST authorities are in a strong position. A top government official told Moneycontrol that this should be determined using factual metrics—that is, verifiable evidence—rather than subjective judgment.

The question of contention is whether specific services—that is, if they were rendered and amounted to nothing more than extra commission—were rendered to the insurance firms in exchange for which bills were generated and paid.

The CBDT is reviewing the tax that insurance businesses have paid over a period of years, notwithstanding GST officials' claims that the money was paid as commission without any underlying services. The Income Tax Department will thus make the necessary corrections, reject the costs, and start certain penalty procedures. The fact that the money was paid in exchange for no services rendered and that a deduction was requested is the particular component under investigation. Insurance firms will be required to pay direct tax on any excess amount if the payment is not considered a genuine expenditure and does not fall within the deduction's purview.

This strikes twice in one go. Insurance is subject to an 18% GST rate and a 25–30% direct tax rate. The reason for the income tax examination is that a deduction was made on an item that ought to have been reported as income. It is a cost, not an income, even if the business bills it as advertising expenditure. Insurance firms have made accusations of accounting fraud. A second individual with knowledge of the situation told Moneycontrol, "A company cannot book income as expenditure and claim deduction."

With effect from April 1, 2023, IRDAI eliminated the limitation on commission paid to agents in order to maintain openness in the insurance industry.