Insurance companies likely to soon face GST audits

Insurance companies may soon face goods and services tax (GST) audits as tax authorities plan a “deep dive” into their business practices to check for the possibility of a raft of tax-linked irregularities.

Several insurance companies are being probed for wrongly availing of the input tax credit without the underlying supply of goods and services based on fake invoices generated by their channel partners and intermediaries.

“We want to deep dive into the overall business and see if there are further taxation issues besides commissions, which are already being investigated,” a senior official of the Central Board of Indirect Taxes and Customs (CBIC) told Business Standard.

He said the ongoing probe against insurance companies is looking at one aspect of the business — how the commission payment system is being misused while bypassing regulatory norms.

According to him, audits will be conducted to understand the business practices and whether there are other tax-related irregularities.

GST audits are typically conducted to verify declared sales, taxes paid, refunds claimed, and input tax credits availed of by looking at tax returns and other records maintained by businesses.

Any mismatch in information across documents could raise a red flag.

“During a GST audit, we often look at the company’s financials, along with the income-tax data to tally whether there is correspondence in what they’ve declared,” said an official quoted earlier.

Departmental GST audits gained momentum in 2022-23 after businesses were given adequate time to adapt to the indirect tax regime rolled out in 2017.

In the current financial year (2023-24), 50,000 cases were selected to be audited, CBIC chairman Vivek Johri told this newspaper in an interview.

“The insurance business has been subject to a long investigation process over the past year.

"It would hope its channel partners are not exposed to a detailed assessment process immediately and that the data already submitted is used for assessment as well,” said M S Mani, indirect tax partner, Deloitte.

It bears mentioning that the Directorate General of GST Intelligence, an investigative arm, is currently probing 15 insurance companies and several of their intermediaries and channel partners over fake invoices and wrongly claimed input tax credit.

So far, it has recorded the statements of all insurers and respective intermediaries and is preparing to issue show cause notices — some of the intermediaries have learned to have already issued notices.

Officials claim these entities had an agreement to pass on ineligible input tax credit under the guise of marketing services, and fraudulent invoices were raised with the connivance of each other.

The total GST evasion in the ongoing matter has not been determined. But a back-of-the-envelope calculation pegs it at over Rs 2,500 crore.

The insurance sector regulator — the Insurance Regulatory and Development Authority of India — has lifted the limits on the payment of commissions to insurance intermediaries.

With this, life and non-life players will have a freer hand in offering commissions. However, the policy change is not retrospective; hence, it will not impact the continuing tax probe.