Tax authorities have widened an ongoing probe against a few financial-sector companies including insurers and mutual funds, for alleged tax evasion, with both the Goods and Services Tax and the Income Tax departments planning to send more show cause notices to them.
“This is an industry-wide issue that is being investigated by both the income tax and GST officials,” said a senior official, noting that the issue does not fall in the purview of the insurance regulator and is hence being investigated by tax officials.
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“The Insurance Regulatory and Development Authority of India may not have the wherewithal to deal with tax evasion problems,” he said, adding that both the indirect and direct tax departments are looking into transactions in the sector.
The Directorate General of GST Intelligence is planning to send show cause notices to more insurance companies as well as mutual fund firms for alleged tax evasion by wrongfully availing input tax credit.
“About three to four more show cause notices will be sent out soon and all zonal offices are looking into the issue based on the trends that were found in the investigation,” said another source familiar with the development. Notices were earlier sent by the Mumbai, Meerut and Gurugram zonal offices of the DGGI to a large number of insurers.
“However, the top brass of companies may not involved in (the tax evasion attempts). It is largely the lower and middle management that has been aiding such malpractices,” the second source said.
According to estimates, in the insurance sector notices have been sent for an estimated GST evasion of `2,800 crore of which `550 crore has been realised. Similarly, of the estimated evasion of `160 crore in the mutual fund industry, about `67 crore of GST dues has been realised.
The DGGI had begun a probe into the insurance sector in 2022 after it was found that some of these companies were ineligible for availment of input tax credit. During the investigations, it was found these insurance companies availed the credit on the basis of invoices issued by several intermediaries for providing services of advertising, marketing, brand activation even when no such services had actually been provided.
In the absence of any underlying supply, the input tax credit availed by these firms is not permissible under the GST law. As per IRDAI regulations, only nominal commission is permitted to corporate agents. To circumvent these norms, the insurers obtained invoices from these intermediaries for supply of services of advertising, web marketing even when there was no such supply of services to transfer higher than permitted commission to NBFCs working as corporate agents. In turn, these intermediaries have received invoices from NBFCs for such supplies.
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While there are no exact estimates of income tax evasion, another source indicated that this is running into thousands of crores of rupees. The investigation by the Central Board of Direct Taxes into practices by insurance companies was linked to the DGGI probe. The income tax authorities are now also investigating links with banks on the payment of these commissions. However, DGGI has now expanded its probe into banks as of now.