Exclusive: I-T department alleges evasion by insurers, likely to send Rs 25,000 cr tax notices

The income tax department is likely to send out demand notices worth a total of Rs 25,000 crore, by March-end, to multiple insurance companies.

The income tax department is likely to send out demand notices worth a total of Rs 25,000 crore, by March-end, to multiple insurance companies that have paid higher commissions and claimed deductions for the period before April 1, 2023, a senior government official said.

“CBDT is doing a reassessment of the tax paid by insurance companies in certain years before April 1, 2023. The income tax department is in the process of sending out tax notices. By March-end all the income tax notices will be sent for a quantum of approximately Rs 25,000 crore,” the official told Moneycontrol.

The dispute is over the extra commission the tax department says was paid to agents and intermediaries over and above the limit set by the Insurance Regulatory and Development Authority of India (IRDAI). The tax authorities are investigating the additional commission paid by insurance companies in the garb of some other expenses.

The Central Board of Direct Taxes (CBDT) is probing the insurance companies for evasion. IRDAI from April 1, 2023, lifted the capping limits on commissions paid to agents to ensure transparency in the insurance sector.

The income tax department claims that additional commission was paid and deductions claimed without any service having been provided. If the payment made was not actual expenditure, it will not come under deduction and the insurance companies will have to pay direct tax on a higher amount. CBDT will make tax adjustments, disallow expenses and may initiate some penalty proceedings, he said.

“As far as the income tax probe goes, it is because a deduction was allowed on something that ought to have been accounted as income. If a company claims it as advertisement expenditure, it’s a cost, whereas commission is income. There is alleged fraudulent accounting by insurance companies. A company cannot account income as an expense and claim deduction,” another source aware of the development said.

GST probe

In a similar probe, the DGGI had sent out notices to at least 15 insurance companies, including Bajaj Allianz, Aditya Birla Sun Life Insurance, and HDFC Life Insurance for evasion of Goods and Service Tax (GST) of over Rs 2,350 crore in 2023. HDFC Life in June 2023 had said it received a show-cause notice from the Directorate General of GST Intelligence (DGGI) demanding Rs 942 crore tax for the July 2017 to FY22 period.