The goods and service tax (GST) authorities are set to issue show-cause notices to 29 insurance companies, a leading private bank, around five non-banking financial companies (NBFCs), and over 100 vendors. These entities were involved in paying for fictitious services to enable the insurers to pay a bank commission that was more than permitted under law.
An insurance company, which is part of the same group as a leading private bank, paid a significantly inflated commission to the bank by supplying them with office staff to sell their insurance policies to loan borrowers. The insurance company outsourced the management of payroll and manpower to a multinational company (MNC) and deployed them at various offices of the bank.
Another 28 private insurers are under investigation by the GST authorities for availing fraudulent input tax credit (ITC) for excess commission payments to finance companies for fictitious services by supplying manpower or by paying in kind. As against the permitted 15% commission, insurers have paid up to 70% of the first-year premium under various heads. The insurance company paid for the manpower utilised by the distributor but claimed ITC.
During the investigation, the insurance companies voluntarily paid Rs 800 crore of the fraudulently claimed ITC, but the GST authorities are continuing with the investigation as it is expected that the amount involved could be a couple of thousand crores. The income tax department is also investigating these companies in an over Rs 13,000-crore tax-evasion case.
According to a GST official, a lender can exert influence over borrowers while extending consumer, auto or home loans and push insurance policies. Insurers therefore compete among themselves in paying higher commission to the finance companies to push their products. The modus operandi for paying higher commission was for the insurer to hire people from staffing MNCs, but these hired staff would work for the banks and NBFCs.
“During investigation, it was found that none of the employees placed at banks/NBFCs are assigned any work of insurance companies. ITC was availed by insurance companies for workforce deployed and working for other companies,” said a GST officer. “Salary of these outsourced employees came from insurance companies, but they were working for the bank or NBFCs,” he added.
Officials of the staffing MNCs said that their contracts were with the insurance companies and it’s not their concern where the insurance companies deployed the manpower.