10 more insurers being probed for misusing ITC

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After launching investigations against 20 insurance companies for wrongful availment of input credit tax, the director-general of GST intelligence (DGGI) is widening its net to include 10 more general insurance companies. To date, the department has uncovered frauds worth Rs 2,500 crore. Out of this, the firms have voluntarily paid back about Rs 750 crore.

What is the issue? In 2022, DGGI found that some insurance companies had incorrectly taken advantage of input credit tax. They did so by producing invoices from services providers, who apparently aided them with advertising, brand management, marketing and more.

However, such services were never delivered by the said intermediaries in the first place, thereby making any input credit tax (ITC) redundant. Many private insurance companies were also found complicit in this practice.

Section 122 of the Central GST Act identifies issuing an invoice without supply as a non-bailable offence, with penalty and imprisonment of up to five years. This is applicable in case the amount involved is more than Rs 5 crore.

ITC is deductible from a registered entity’s total payable GST, if the goods/services purchased by it are purely for business purposes. This reduces the total tax liability of the entity in concern. Many experts have pointed out that the new rules put in place by insurance watchdog IRDAI will curb such exercises to some extent.

What is the new rule?

Effective April 1, 2023, IRDA has set a ceiling on the total expenditure an insurance company can incur while paying its agents and other service intermediaries. Depending on the limits set, the payouts cannot exceed the total corpus for expenses on management of insurers. This replaced separate percentage and product-based payments that were earlier made to them, particularly the agents.