Income Tax Investigation against Insurers widens to Banks; Says Report

In its ongoing investigation into potential fraud involving commission payments made by insurance companies, the income tax department notified two significant private banks, according to a report.

Investigators from the tax department are reportedly looking into transactions worth more than Rs 60,000 crore as well as potential GST (goods and services tax) fraud of more than Rs 5,500 crore, according to the report.

These insurance companies are under investigation by the I-T department and the Directorate General of GST intelligence (DGGI) for alleged irregularities and possible tax fraud.

Over 20 insurance providers and about 500 businesses connected to their sales representatives were initially being investigated by the I.T. agency. However, the focus of the investigation has now turned to banks after it is claimed that the examination turned up several transactions that necessitated more explanation.

According to the newspaper, which quotes a source who is familiar with the notifications’ contents, “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.”

The Insurance Regulatory and Development Authority of India (IRDAI) eased restrictions on commission payments to insurance middlemen last month. The prior limit on commission payments has been superseded by new regulations with a general ceiling on insurance administration expenses.

Many insurance companies, according to official sources, pay overriding commissions to banks and other intermediaries in addition to the legal fee, raising worries about potential exploitation and driving up administrative costs within the insurance sector. According to allegations, banks that serve as corporate brokers for insurance businesses “took the legal commission from these firms through legal channels, although the overriding commission was allegedly routed through various ways.”

The investigation mentioned a number of incidents when banks invoiced insurance companies for marketing activities, but the events were never held, according to sources. “at one occasion,” the document states, “a bank requested an insurance business to host an insurance awareness marketing event at its facilities across numerous locations, but the activity was never carried out. The event, which cost the bank money for marketing and refreshments, was still charged to the insurance company.

In other cases, banks asked for advertising space on their property and charged insurance firms twice as much as was customary. Questions about the transparency of such transactions arose because banks were also paying employees who sold insurance policies. There have also been cases of technology outsourcing when a single vendor was utilised and the insurance company was charged. According to the research, all of these actions have raised worries about rising administration costs inside the insurance sector.