General insurance companies struggling to pay their service tax dues of about Rs 2,500 crore have got a lifeline from the Insurance Regulatory and Development Authority (Irdai).
The tax dues have arisen because of the common practice of paying commission to auto dealers, which apparently violates some insurance norms. However, insurance companies find it difficult to break the practice in the competitive market for selling car insurance. To address this issue and to "bring clarity and transparency in payouts made to the auto dealers by insurers", Irdai has set up a committee headed by Suresh Mathur, senior joint director of Irdai.
The members of the seven-member committee include representatives from ICICI Lombard, Bajaj Allianz and New India Assurance. The other members are from Maruti Insurance Brokers and from Hyundai Motors.
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The tax official said the suo-motu formation of a committee by the regulator will make it difficult for them to pursue the demands as the companies would ask the department to wait for the report.
In August this year, the indirect tax department with the Directorate General of Central Excise Intelligence detected service tax evasion in motor vehicle insurance. The finance ministry in a release said all 16 general insurance companies operating in India were suspected to be engaged in it. "All of them are being investigated for wrongly availing Cenvat Credit on the bogus invoices of the car dealers." It is a common practice for car manufacturers to tie-up with insurers to set up 'preferred car insurance companies'. Under this, auto makers advise their dealers to offer insurance policies only through insurers with whom they have a tie-up. These insurers, in turn, pay two-three per cent commission on the value of the insurance policies to the car companies and 15-45 per cent to car dealers. The tax department considers the latter illegal, because insurance commissions are supposed to be capped at 10 per cent. To get around this, car dealers raise invoices to show they have provided services such as advertisement, renting of computers / printers, training, and arranging of customer awareness programmes.
"As these services were never provided by the car dealers, their invoices are not permissible documents under the CENVAT Credit Rules, 2004 and the Service Tax Rules, 1994 for availing Cenvat credit by the insurance companies", the tax department argues.
"While we have received confirmation from two or three insurance companies that they have changed (the practice of giving commission to car dealers), we are yet to receive confirmation from most others," said a letter addressed to the chiefs of all general insurance companies written by R Chandrasekaran, secretary-general, General Insurance Council.
The committee will give its report in two months, after which the regulator will decide on setting up industry-wide guidelines.