India's insurance sector is bracing for a protracted legal confrontation with tax authorities after the goods and services tax (GST) adjudicating authority (AA) recently confirmed a Rs2,400 crore demand against HDFC Life Insurance. This ruling could establish a precedent that might push the industry's total tax liability beyond Rs5,500 crore, a report says, quoting a senior government official.
According to
the report from Economic Times (ET), the ruling against HDFC Life stems from an extensive investigation by the directorate general of GST intelligence (DGGI), which has sent show-cause notices to about 30 insurers for allegedly claiming input tax credit (ITC) without legitimate underlying services.
In a regulatory filing, HDFC Life confirmed that the GST AA issued a 'corrigendum' for the period between July 2017 and March 2022, demanding tax and penalties totalling Rs2,422 crore. The insurer has already deposited Rs250 crore with the department and intends to file a rectification application regarding the penalty amount, which it claims has been 'erroneously enhanced'.
"The Company is in the process of filing a rectification application before the tax authority with respect to the penalty amount which has been erroneously enhanced. Post passing of the rectification order, the penalty amount shall be retained as originally disclosed," it added.
According to GST authorities, the investigation revealed that HDFC Life made commission payments exceeding regulatory limits through intermediary vendors disguised as marketing expenses. The insurer allegedly issued invoices without actual services being rendered, with the adjudicating authority concluding that transactions were paper-based with no underlying supply of goods or services.
"This was solely to facilitate the indirect payment of commission above IRDAI limits. As a result of these transactions, the input tax credit of GST against such invoices is not eligible under Section 16 of the CGST Act," an officer told ET, citing the probe findings.
The authority determined that HDFC Life routed excessive commission payments to corporate agents under the guise of advertising expenses through marketing vendors. "Statements of key HDFC Life personnel confirm that vendors raised invoices for fabricated marketing activities, such as web banners, email campaigns and standee placements, solely based on instructions from HDFC Life," the AA noted in its order.
Court Relief for ICICI Lombard May Signal Hope for the Insurance Sector
In a significant development that could influence ongoing cases, the Delhi High Court (HC) in December 2024 quashed a GST demand against ICICI Lombard General Insurance amounting to nearly Rs150 crore, along with interest of Rs124.34 crore and penalties of Rs14.95 crore for FY19-20.
HC directed the adjudicating authority to reevaluate the case based on the company's original response to the show-cause notice (SCN). The demand was related to ITC availed by the company and reconciliation differences between values reported in monthly returns and annual returns.
This judicial intervention could potentially offer a precedent for other insurance companies currently contesting similar GST demands, suggesting that courts may scrutinise tax department orders carefully before allowing such substantial recoveries.
Industry-wide Investigation
Reliance General Insurance Company (RGIC), a Reliance Capital subsidiary, received four notices from the DGGI in October 2023 demanding GST totaling Rs922.58 crore on revenue generated from reinsurance and co-insurance services. The largest notice, amounting to Rs478.84 crore, concerned GST applicability on reinsurance commission, while another for Rs359.70 crore related to co-insurance premium received as a follower in co-insurance transactions.
In November 2023, British insurance giant Aviva's life insurance unit near New Delhi was searched by tax inspectors who seized documents and laptops as part of the ongoing investigation. Officers questioned several officials, including chief executive officer (CEO) Asit Rath and chief financial officer (CFO) Sonali Athalye.
As of July 2023, investigations into 15 insurance companies had been completed, with authorities detecting tax evasion worth Rs2,350 crore. Companies, including Bajaj Allianz, Aditya Birla Sun Life Insurance, and HDFC Life Insurance, along with some public insurers, were found evading GST, with about Rs700 crore recovered so far.
The investigations began in October 2022 when GST authorities uncovered an alleged misappropriation of input tax credit worth Rs824 crore by 16 insurance companies who used intermediaries to issue fake invoices. "Investigations have revealed that input tax credit of Rs824 crore has been availed, out of which an amount of Rs217 crore has been paid voluntarily by these sixteen insurance companies so far," the finance ministry stated at that time.
Modus Operandi
According to an October 2023 report published in Economic Times, insurance companies and their intermediaries allegedly evaded nearly Rs30,000 crore in income-tax through a meticulous web of transactions since July 2017. The companies supposedly suppressed income and reported fake expenditures.
The investigation revealed several methods used by insurers to circumvent regulations:
1. Employee Deployment Scheme: Insurance companies paid salaries to staff ostensibly hired through multinational staffing firms, but these employees actually worked for banks selling insurance policies to loan borrowers.
2. Inflated Marketing Costs: Banks charged insurance companies for marketing activities that were never conducted, or requested advertising space in their premises at double the market rate.
3. Technology Outsourcing: Common vendors were used with bills raised to insurance companies.
4. Dedicated Email Systems: Some insurance firms maintained dedicated email ID pools managed by select employees who tracked payments made to agents through layered business entities.
The insurance industry maintains that these actions by the DGGI and income-tax department are unjust, arguing that the commission issue is a matter of legal interpretation rather than fraud. Industry representatives have sought audience with the finance ministry for intervention, while affected companies consider legal challenges to the tax demands. The insurance sector continues to prepare for what promises to be a prolonged legal battle with significant financial implications across the industry.
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