The Indian insurance industry is gearing up for a prolonged legal battle with tax authorities after the Goods and Services Tax (GST) adjudicating authority (AA) confirmed a demand of Rs2,400 crore against HDFC Life Insurance.
This ruling is expected to set a precedent, potentially increasing the industry’s total tax liability beyond Rs5.500 crore, according to an Economic Times report quoting a senior government official.
HDFC Life’s Rs2,400 Crore GST Dispute Explained
HDFC Life, in a regulatory filing, disclosed that the GST AA issued a ‘corrigendum’ for the period from July 2017 to March 2022, demanding Rs2,422 crore in taxes and penalties. The insurer has already deposited Rs250 crore and plans to file a rectification application, claiming that the penalty amount has been “erroneously enhanced.”
According to GST authorities, the investigation revealed that HDFC Life made commission payments exceeding regulatory limits through intermediary vendors disguised as marketing expenses. It allegedly issued invoices without actual services being rendered, leading to the conclusion that these transactions were paper-based with no real supply of goods or services.
GST Relief for ICICI Lombard – A Precedent for Insurers?
In a development that could influence ongoing cases, the Delhi High Court (HC) quashed a GST demand of nearly Rs150 crore against ICICI Lombard General Insurance in December 2024. The court directed the adjudicating authority to reevaluate the case based on the company’s original response to the show cause notice. This decision suggests that courts may carefully scrutinize tax department orders before allowing large recoveries.
Major Insurers Under GST Investigation
The investigation has impacted several other insurers, including:
- Bajaj Allianz General Insurance received a notice in September 2023 for a GST demand of Rs1,010.05 crore related to co-insurance premiums and reinsurance commissions.
- Reliance General Insurance Company received four notices in October 2023 demanding a total of Rs922.58 crore for revenue from reinsurance and co-insurance services.
- Aviva Life Insurance’s New Delhi office was searched by tax officials in November 2023, with documents and electronic devices seized for examination.
As of July 2023, investigations into 15 insurance companies had identified tax evasion worth Rs2,350 crore, with Rs700 crore already recovered.
Key Tax Evasion Tactics in the Insurance Industry
Authorities claim insurance companies used various methods to evade GST and income tax, including:
- Employee Deployment Scheme: Salaries were paid to staff hired through multinational staffing firms, but these employees actually worked for banks selling insurance policies.
- Inflated Marketing Costs: Banks charged insurers for marketing activities never conducted or demanded advertising space at inflated rates.
- Technology Outsourcing: Vendors were used to generate bills for services not rendered.
- Dedicated Email Systems: Insurers managed email ID pools to track payments made to agents through layered entities.
Future of GST Disputes in the Insurance Sector
The insurance industry argues that these tax demands are based on legal interpretations rather than fraudulent activity. Industry representatives have sought intervention from the finance ministry, while affected companies prepare for what is expected to be a prolonged and costly legal battle.
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