The Income Tax department accuses insurers of tax evasion and is expected to issue tax notices totaling Rs 25,000 crore.

By the end of March, the Income Tax department is poised to issue demand notices totaling Rs 25,000 crore to numerous insurance companies. A senior government official disclosed that the notices are related to higher commissions paid and deductions claimed by these companies for the period preceding April 1, 2023.

According to the official, the Central Board of Direct Taxes (CBDT) is conducting a reassessment of taxes paid by insurance companies for certain years before April 1, 2023. The department is currently in the process of dispatching these tax notices, aiming to complete the task by March-end.

The contention arises from the additional commission allegedly paid to agents and intermediaries, exceeding the limits set by the Insurance Regulatory and Development Authority of India (IRDAI). Tax authorities are investigating these additional commissions, suspected to have been disguised as other expenses by insurance companies.

Since April 1, 2023, IRDAI has removed capping limits on commissions paid to agents to enhance transparency in the insurance sector.

The Income Tax department asserts that these additional commissions were paid and deductions claimed without corresponding services being provided. Consequently, if the payments were not genuine expenditures, they would not qualify for deduction, leading to higher direct tax liabilities for insurance companies.

The CBDT is conducting an investigation into potential evasion by insurance companies. They may disallow certain expenses, make tax adjustments, and even initiate penalty proceedings, the official noted.

Another source familiar with the situation highlighted that the crux of the income tax probe lies in the alleged fraudulent accounting practices of insurance companies. Claiming income as an expense and seeking deductions is deemed unacceptable. For instance, if a company categorizes income as advertisement expenditure, it misrepresents it as a cost, whereas commission constitutes income.