The Comptroller and Auditor General (CAG) has flagged certain compliance-related issues and ambiguity in various rules governing the insurance sector, which has caused a loss of Rs 352.55 crore to the exchequer from 2010-11 to 2012-13.
CAG has made these observations on the basis of scrutiny of records in seven commissionerates. These commissionerates are: Delhi Service Tax Commissionerate, Large Taxpayer Unit Commissioerate in Delhi, Mumbai and Chennai, Service Tax I and II Mumbai Commissionerates and Pune III Commissionerate. The loss was caused due to non-payment or delayed payment of service tax on reinsurance services, non-payment of taxes on certain services due to ambiguity in certain provisions, etc. One of the main anomalies pointed out was on the taxability of the trading activities undertaken by insurance companies in Ulips.The CAG alleged that this has led to a revenue leakage of Rs 253 crore between 2010-11 and 2012-13.
According to the circular issued by the indirect tax department in 2010, service tax is applicable to all types of administrative charges under insurance service.
However, there is a lack of clarity on whether a trading activity under ULIP constitutes administrative functions and thus taxable.
According to CAG, this anomaly had led to companies such as DLF Pramerica, Max Life, Aviva, Canara HSBC Oreintal Bank and ICICI Pru Life not paying service tax. The ambiguity on taxability of ULIP on account of trading activity had also led to misuse of input credit.
The CAG recommended that Central Board of Excise and Customs should issue appropriate guidelines on taxability of trading activity by insurers. "CBEC may consider issuing a clarification on the correct treatment in respect of trading as per investment activities carried out by insurance service providers," said CAG in the report.
The auditor also stated the input credit should not be given on trading activities if they are exempt from service tax. The report also stated that three insurance brokers and one insurance company have fallen short on their service tax payment totalling Rs 14.72 crore during 2010-11-2012-13.
The input credit has been misused by insurance providers also in case of payment of educational cess.
According to the auditor, the input credit on education cess cannot be used for payment of basic service tax. Among other loopholes, incorrect usage of input credit had hit the exchequer by over Rs 3 crore during this period. Insurance companies had yielded Rs 11,034 crore, contributing 8.32 per cent to the total service tax during 2012-13.
