Massive Tax Evasion by Insurance Companies and Intermediaries Uncovered; A ₹30,000 Crore Scandal

The income tax department has identified tax evasion of approximately ₹30,000 crore by insurance companies and their intermediaries since July 1, 2017, which marks the inception of the Goods and Services Tax (GST) regime. 

This evasion primarily occurred through the suppression of income and the presentation of fictitious expenses, as per an internal assessment conducted by the income tax department.

Officials familiar with the matter revealed that the tax department is currently in the process of issuing tax demand notices to these entities in order to recover the outstanding tax amounts. 

At the same time, it is anticipated that the final amount may increase once interest and penalties are factored in.

A senior official explained, “We are sending out demand notices, along with the corresponding penalties and interest, to the companies separately. They will be provided with the mandated period to respond to these notices or contest them. The assessment officer will determine the specific amounts for interest and penalties.”

This investigation began last year when the income tax department, in collaboration with the Directorate General of GST Intelligence (DGGI), discovered that certain insurance companies were circumventing regulations related to commissions. 

They were found to be making excessive payments to agents and intermediaries using invoices that were later identified as fraudulent.

The income tax department scrutinized the loss of income tax attributed to these artificially inflated expenses. Another official added, “There were also instances of false corporate social responsibility (CSR) expenses, where events that never occurred were claimed, and highly exaggerated advertising and event bills were submitted. We possess detailed transaction information related to these instances.” 

Initially, the probe covered 30 insurance companies, 68 tax agents, and intermediaries, but it was subsequently expanded to encompass several banks that had been functioning as insurance intermediaries throughout the country. 

In cases where banks served as intermediaries, it was discovered that insurance companies were covering the manpower supply costs of the banks, a cost that was not properly recorded in the banks’ financial books.

This failure to disclose such financial arrangements is considered a significant violation under income tax laws, according to the second official. 

The DGGI was concurrently investigating instances where insurers were claiming input tax credits without the underlying supply of goods and services, often relying on counterfeit invoices supplied by intermediaries. 

The DGGI estimated that this led to GST evasion totalling ₹3,500 crore. The official noted, “This was a joint investigation and an example of effective data sharing with the DGGI, which provided critical data and evidence to support the probe.”

The List 

• In August, ICICI Lombard had received a show-cause notice from the Directorate General of GST Intelligence that demanded Rs 273 crore in taxes. 

The demand of Rs 273 crore pertained to GST associated with salvage and ineligible tax credit related to motor insurance claims, as detailed in a stock exchange notification. 

In response, ICICI Lombard has deposited Rs 104 crore, with a protest, without accepting any responsibility in this matter.

ICICI Lombard had also announced that it had received a notice of demand dated May 29, 2023, amounting to Rs 94.14 crore.

• HDFC Life on June 23 said it received a show cause notice from DGGI demanding Rs 942 crore tax for July 2017 to FY22.

• ICICI Prudential Life Insurance had also received notice for an alleged GST liability of nearly Rs 492 crore.

• Life insurance giant LIC of India, said that it has received a GST demand order for lower payment of taxes. 

As per the notice, LIC paid 12% GST instead of 18% on certain invoices. It had also received Income Tax penalty notices of Rs 84 crore earlier this month and Rs 290 crore in September.

In September, the life insurer received another tax demand for more than Rs 166.75 crore, with more than Rs 107 crore interest charged, and the penalty cited was above Rs 16.67 crore together amounting to over Rs 290 crore.

The life insurance giant is going through a rough patch performance-wise; its premium collection has dropped by 25% in the first half of FYFY24. The share of LIC in monthly new business premium (NBP) in the life insurance sector declined by a whopping 975 basis points (bps) to 58.50% in September 2023 from 68.25% in the year-ago period.

While the companies plan to take legal action, HDFC Life deposited Rs 50 crore, and ICICI Prudential Life Insurance deposited Rs 190 crore during the inquiry without accepting liability.

The Last Bit, 

The uncovered tax evasion, amounting to ₹30,000 crore, has sent shockwaves through the insurance industry and raised serious concerns about regulatory compliance. 

The income tax department’s ongoing effort to send tax demand notices and recover these dues, along with the prospect of additional penalties and interest, is a grave consequence for the insurance companies.