Income Tax Notices sent to Insurers’ Intermediaries under benami law over alleged Fund Routing Violations

In an unexpected twist, insurers and their agents are now receiving notices under the Benami Transactions (Prohibition) Amendment Act of 2016, following their encounters with income and service tax authorities last year. Some marketing intermediaries and insurance brokers apparently received notices, raising concerns about financial routing and evading rules.

Over the past week, at least six organisations functioning as agents and marketing middlemen have received notices under the Benami Transactions Act, specifically section 19. The letters request detailed information about transactions with specific parties as the Income Tax department looks into a possible benami angle.

A benami transaction entails transferring property or assets to someone who is not the genuine beneficial owner. In this case, middlemen are suspected of passing on inflated commissions from insurance companies to their legitimate representatives.

Last year, insurance businesses were scrutinised for exceeding commission restrictions set by insurance regulations. The updated recommendations call for a more thorough inquiry into alleged benami transactions. It is suspected that intermediaries served as go-betweens, channelling additional payments to agents while avoiding regulatory restrictions placed on insurers.

An expert questioned whether the additional payments could be considered ‘benami’ under the Act, emphasising the need of determining whether a transfer of property occurred as defined by the legislation.

The IT department had previously questioned the deduction of ‘surplus or illegal’ commissions, while the Goods and Services Tax (GST) office looked into insurers’ input credit claims. The cases are at various stages of adjudication, with one previous report revealing a “uncovered evasion of more than Rs 15,000 crore.”

The benami twist adds a new level of complication, potentially affecting multiple parties involved in the conflicts. The current procedures emphasise the need of interpreting the law’s provisions and providing robust documentation.

These disputed transactions occurred before 2023, when the Insurance Regulatory and Development Authority of India (IRDAI) revised its regulations on commission payments. The IRDAI‘s new regulations, which go into effect on March 26, 2023, replace the individual commission payment cap with an aggregate management expense cap for insurers.

As insurers and agents grapple with the implications of the benami law, the proceedings exacerbate the industry’s already daunting issues, raising concerns about the financial and legal ramifications for all parties involved.