Insurers’ intermediaries get Income Tax notices under benami law over alleged fund routing violations
After run-ins with income and service tax authorities last year, insurers and their agents will now have a brush with the harsh benami law.
Over the past one week, some companies acting as agents and marketing intermediaries of insurance companies have received notices under the Benami Transactions (Prohibition) Amendment Act, 2016, for allegedly routing funds to sidestep regulations.
Two persons aware of the development told ET that at least half a dozen firms have been served the notices, seeking details of transactions with certain parties under section 19 of the Benami Act.
A benami deal is a transaction or an arrangement where a property or assets like stocks or funds is “transferred” to or is “held” by a person but the consideration of such property has been provided or paid by another person. In other words, the holder of the asset (the front) is not its true beneficial owner.
Thus, the benami angle is being probed by the Income Tax (I-T) department amid suspicion that certain intermediaries were used as conduits in passing on inflated commission from the insurance companies to their official agents.
Last year, insurance companies jostling for market share in a fiercely competitive business came under the glare for paying commission to agents beyond what was allowed under insurance regulations.
“The recent notices from the I-T department under the Benami Property Act were sent to assessees who have already been assessed u/68 of the Act on the said amount. Now, the question that crops up and has to be dealt with is whether the amount can be treated as ‘Benami’ as per definition 2(a) of Act and whether there has been a transfer of property,” One of the expert said.
Here’s what is being suspected: an insurer which could not have paid more than Rs X to an agent, makes an additional payment of Rs Y to another intermediary, which, net of handling charges, passes on bulk of the amount Rs Y received to the agent. It’s about finding a way to bypass regulations to reward an agent over and above that’s permissible to push the company’s products. The intermediary, acting as the go-between, is the ‘benamidar’; the agent is the ‘real beneficiary’ while insurers, having initiated the transactions, may not be able to escape the heat.
GST Probe
Earlier, the I-T department had questioned the deduction of the ‘surplus or illegal’ commission while the office of the Goods and Services Tax (GST) questioned the input credit claimed by the insurers. Input tax credit (ITC) allows businesses to lower their tax liability on sale by claiming credit to the extent of GST paid on purchases. GST is paid by consumers and remitted to the government by the businesses selling the goods and services.
The I-T and GST cases are at various stages of adjudication. The income tax department probe, according to an ET report last August, “uncovered evasion of more than Rs 15,000 crore”, and covered more than 25 insurers and over 250 businesses that were used to route commissions to agents.
“Benami is a law which entails financial and other consequences. Interpretation of some provisions as well as robust documentation and justification in support of the payments would be key considerations in these proceedings,” another expert said.
The benami twist, with the penal provision of the law, may complicate matters for various parties entangled in the disputes.
These deals, challenged by tax and benami laws, were cut before 2023. Under the IRDAI (Payment of Commission) Regulations, 2023 which were notified on March 26, 2023, the earlier individual cap on commission payments on insurance products was replaced with an overall cap on expenses of management of insurers.
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