The income-tax (I-T) department sent notices to two large private banks in its ongoing investigation into possible malpractices involving commission payments made by insurance companies, says a report.
According to the report from Economic Times (ET)
, investigators from the tax department are apparently scrutinising transactions of over Rs60,000 crore and also investigating suspected evasion of goods and services tax (GST) exceeding Rs5,500 crore.
The I-T department and the directorate general of GST intelligence (DGGI) are investigating these insurance firms over alleged malpractices and suspected tax evasion.
Initially, the I-T department was probing more than 20 insurance companies and about 500 entities linked to their sales agents. But the line of investigation has now shifted to banks after the probe allegedly revealed voluminous transactions demanding a further explanation, the newspaper says.
Quoting a source aware of the contents of the notices, the report says, "The notices have been sent under Section 131 of the Income Tax Act and information about the manpower deployed by the banks and the mode of payments had been sought."
Last month, the Insurance Regulatory and Development Authority of India (IRDAI) lifted limits on the payment of commissions to insurance intermediaries. According to new rules, the earlier cap on commission payments is now replaced with an overall cap on expenses of management of insurers.
According to Shrirang Samant, who worked in senior leadership roles in the general insurance industry, the issue is not the payment of a commission but the way it was being routed to the recipients. Mr Samant wrote an article in Moneylife ‘Demystifying Regulatory Changes in Insurance Commissions’
in which he shared his views on the IRDAI rules and the newspaper report.
Talking about the news report, he asks how this alleged evasion came about. "The genesis lies in the regulatory caps on payment of commission—until now, the regulator laid down the commission caps for various classes of insurance products. The fact was that these caps served as the floor for commission payments rather than the ceiling, which was the intention."
Distributors of insurance products, be they brokers or agents, used their market access to demand ever higher commissions from insurance companies, he says, adding in their initial frenzy to acquire and grow market share, insurance companies had to give in to these demands.
Official sources told the newspaper that many insurance companies are paying overriding commissions to banks and other intermediaries on top of the legal commission, which led to concerns over potential exploitation and a rise in management expenses within the insurance industry. "Banks that act as corporate brokers for insurance companies allegedly took the legal commission from these firms through legal channels, although the overriding commission was allegedly routed through various ways."
"The probe has found that the insurance companies, through the intermediaries, paid the manpower supply (also called payroll or employee) costs of the banks," the first official cited above told ET. "So, these expenses were never reflected in the books. If proven, this amounts to non-disclosure, which is a severe violation under the I-T laws."
Earlier, the newspaper had reported that since the companies could not officially show the actual amount of payment to the distributor as commission, various stratagems were used, such as shell companies paying high commissions to agents and allegedly accounting for these payments as marketing or advertising expense to reduce the tax outgo.
Mr Samant says it is possible that the idea was not to cheat the exchequer but to avoid being penalised for a breach of the regulatory cap on commission payments. "The whole exercise became problematic with the introduction of GST and the inability of the parties involved to claim input credit for GST. In the words of a cynic, the GST challenge has forced this correction, not any epiphany on the part of the industry participants."
Quoting sources, the newspaper cited several instances where banks charged insurance companies for marketing activities, but the events were never held. "In one case," it says, "a bank asked an insurance company to hold an insurance awareness marketing event in its premises across multiple locations, but the activity was never executed. The bank still charged the insurance company for the event, which included refreshments and marketing costs."
"In other instances, banks requested advertising space in their premises and charged insurance companies double the going rate. Banks were also receiving payments for staff that sold insurance policies, leading to questions over the transparency of such transactions. Additionally, there were instances of technology outsourcing where a common vendor was used and the bill was raised to the insurance company. All of these activities have led to concerns over increased management expenses within the insurance industry," the report says.
Mr Samant feels since the commission is paid out of the premium collected from the policyholder, it stands to reason that the commission should be disclosed on the face of the policy. "This is already a practice in the mutual fund's industry, where the information regarding distributors' commissions is publicly available," he added.