The income-tax (I-T) department sent notices to two large private banks in its ongoing investigation into possible malpractices involving commission payments made by insurance companies, says a report.
According to the report, investigators from the tax department are apparently scrutinising transactions of over Rs 60,000 crore and also investigating suspected evasion of goods and services tax (GST) exceeding Rs 5,500 crore.
The I-T department and the directorate general of GST intelligence (DGGI) are investigating these insurance firms over alleged malpractices and suspected tax evasion.
Initially, the I-T department was probing more than 20 insurance companies and about 500 entities linked to their sales agents. But the line of investigation has now shifted to banks after the probe allegedly revealed voluminous transactions demanding a further explanation.
Quoting a source aware of the contents of the notices, the report says, "The notices have been sent under Section 131 of the Income Tax Act and information about the manpower deployed by the banks and the mode of payments had been sought."
Last month, the Insurance Regulatory and Development Authority of India (IRDAI) lifted limits on the payment of commissions to insurance intermediaries. According to new rules, the earlier cap on commission payments is now replaced with an overall cap on expenses of management of insurers.
Official sources told that many insurance companies are paying overriding commissions to banks and other intermediaries on top of the legal commission, which led to concerns over potential exploitation and a rise in management expenses within the insurance industry. "Banks that act as corporate brokers for insurance companies allegedly took the legal commission from these firms through legal channels, although the overriding commission was allegedly routed through various ways."
Quoting sources, the report cited several instances where banks charged insurance companies for marketing activities, but the events were never held. "In one case," it says, "a bank asked an insurance company to hold an insurance awareness marketing event in its premises across multiple locations, but the activity was never executed. The bank still charged the insurance company for the event, which included refreshments and marketing costs."
"In other instances, banks requested advertising space in their premises and charged insurance companies double the going rate. Banks were also receiving payments for staff that sold insurance policies, leading to questions over the transparency of such transactions. Additionally, there were instances of technology outsourcing where a common vendor was used and the bill was raised to the insurance company. All of these activities have led to concerns over increased management expenses within the insurance industry," the report says.
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