Taxman sniffs Rs.2,500-cr wrong claims by auto insurers

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V. Jagannathan | 27 Aug, 2015
The industry watchdog must keep away from the controversy over alleged wrong claim of credit worth Rs.2,500 crore pertaining to central value added tax (Cenvat) by 16 non-life insurers on automobile cover and let the tax department complete the probe, a former regulatory official has said.

As per K.K. Srinivasan, former member of the Insurance Regulatory and Development Authority of India, the issue pertaining to auto insurance, being probed by the Chennai Zonal Unit of the finance ministry's Directorate General of Central Excise Intelligence, has many dimensions.

The directorate says non-life insurers claimed wrong Cenvat credit based on bogus invoices raised by car dealers who entered into pacts with manufacturers to appoint them as preferred insurance companies.

But regulations, the officials said, only allow approved insurance agents and brokers to sell such policies.

"If car dealers have not remitted to the excise department the service tax paid by insurers on the invoices raised by them, it is an offence for which dealers will, perhaps, be responsible -- and not the insurers who are the consumers," Srinivasan told media.

"If the invoices are bogus as alleged, the Cenvat credit taken by insurers become inadmissible."

Officials sought to explain the alleged modus operandi: Car makers enter into pacts with specific insurance companies. Their car dealers are told to sell policies of only the preferred insurers. This fetches a commission of 2-3 percent for manufacturers and 15-45 percent for the dealers.

The tax officials alleged there were several other discrepancies as well.

First, the maximum brokerage or commission that is payable on motor insurance policies is capped at 10 percent. To circumvent that, insurers ask the dealers to raise invoices to show they have provided services like advertisement and computer renting.

"Such invoices are not allowed under Cenvat Credit Rules, 2004, and the Service Tax Rules, 1994, to claim the credit," a senior official involved in the matter said, requesting anonymity. He also alleged some dealers have agency licence in the name of family members.

But a senior official at one of the 16 insurance companies under probe rejected such claims.

"The dealers provide us a variety of services -- like issuance of policies per se, collecting the survey reports and many others. All these involve some charges," the official said, adding these are reimbursed against their service tax registration.

"We go by the dealer's statement. There is no web portal where insurers can check if the dealer has remitted the service tax." he said. "So far, we have not been served any show cause notice. The tax department has only carried out an inspection."

Srinivasan said the watchdog could step into this matter if there are regulatory violations by insurers in the payments made by insurers to the auto dealers. "If any of the auto dealers are also licensed intermediaries, then also the regulatory authority can take action against them."

The former member also explained that both statutory and internal audits of insurance companies look at their expenses. "It is not clear if the audited annual accounts of insurance companies contain any adverse comments on the payments made to automobile dealers."

But the watchdog's action is keenly awaited, as it has already been penalising life insurers for paying higher commissions.

"For quite some time, the perception is that insurers are paying dealers overriding commission in the guise of payments of extra services that, perhaps, exist only on paper. The investigation by the excise directorate may help to bring out the truths," Srinivasan said