GST Notice To Insurers Could Lead To Scrutiny From Other Agencies, Say Experts

Two prominent companies were recently served demand notices by the Directorate General of GST Intelligence.

<div class="paragraphs"><p>Central GST Bhavan, Rajkot.&nbsp;(Source:&nbsp;CBIC website)</p></div>
Central GST Bhavan, Rajkot. (Source: CBIC website)

Tax scrutiny of Indian insurance companies—particularly those which were recently served GST demand notices—leaves room for further scrutiny from other government agencies, according to experts.

Two prominent companies were recently served demand notices by the Directorate General of GST Intelligence. It alleged that the companies had wrongly claimed input tax credit without there being underlying services.

Insurance companies are alleged to have paid a sum to intermediaries, which is further paid to commission agents as excess consideration—over and above the Insurance Regulatory and Development Authority of India's regulations, experts said.

According to Abishek Rastogi, founding partner of Rastogi Chambers, insurance companies could attract scrutiny from other government agencies—such as the income tax department and the Enforcement Directorate—if the GST department is able to substantiate the claims.

In the chain of service where this differential commission is being alleged, the intermediary acts as the service receiver as well as the provider at different points, Rastogi said.

If the intermediary is unable to provide sufficient documentation on being a service recipient, this could trigger a disallowance under Section 148A of the Income Tax Act, initiating a scrutiny for “escaping assessment”.

"One (scrutiny) is with respect to ITC credit under GST law to the extent that ITC is ineligible, whereas (Section) 148A of the Income tax Act could commence investigation for escaping assessment under bogus purchases," Rastogi said.

SR Patnaik, partner and national leader for tax at Cyril Amarchand Mangaldas, said the manner in which the allegation is made and how they would be substantiated could be critical for further scrutiny from other authorities.

"It would depend on how substantive these arguments are and how the allegations would be substantiated by the department. (That) would be interesting to see, as some of the insurance companies (who have received notices) are large listed corporate entities. So, it may not have been possible for them to transfer huge amounts on the basis of fictitious terms," Patnaik said.

To be sure, if the department is able to substantiate false ITC claims without an underlying service, then legal grounds for further investigations do exist.

According to Sandeep Bhalla, partner at Dhruva Advisors, the brokerage or fees to commission agents is highly regulated by the IRDAI.

On the basis of the amended law, the material on record, and the responses of the concerned company, the tax department can hold a case to be fit for reopening based on information suggesting the income has escaped assessment, Bhalla said.

"The cases can be reopened for a period of up to 10 years if the income which has escaped assessment is Rs 50 lakh or more and the conditions stipulated under provisions of Section 149 are satisfied. On reassessment, the Assessment Officer has powers to disallow the expenditure wherein no services are rendered in accordance with the agreement," according to Bhalla.

The income tax department can also run a parallel investigation on the insurance brokers or commission agents. Documentary evidence or proof of services would be the key to decide whether the services were, in fact, rendered. This would depend on proof that the intermediary party did not render any service, thereby creating fake invoices to pass on more money to commission agents.

Although these could be legal grounds for reopening of tax assessments and/or disallowance of expenditure, this would not automatically lead to an adverse finding under the PMLA, Bhalla said.

The potential fallout of further investigation would also involve the IRDAI authorities, who would weigh in on the matter to see if excess commission was passed along, said Rajat Bose, partner at legal advisory firm Shardul Amarchand Mangaldas.

Insurance companies would have to justify their payments and the services rendered to them to avoid losing out on their licences, he said.

The case could potentially have an effect on other regulated industries such as pharma where there have been disputes regarding the eligibility of input credit, according to him.

Pharma companies have sought clarity from the Bombay High Court on treating free samples as genuine business expenses. The GST authorities have reportedly taken the position that free samples and gifts fall under 'sales' and are not entitled to be considered "input costs".

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