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Reliance General Insurance Company (RGIC), a subsidiary of Reliance Capital, finds itself in a bind as the Directorate General of GST Intelligence (DGGI) has issued multiple Show Cause Notices (SCNs) amounting to Rs 922.6 crore.
This development comes at a time when Reliance Capital is currently undergoing a debt resolution under the National Company Law Tribunal (NCLT) process in which the Hinduja group has emerged the winner.
The Hinduja acquisition is currently awaiting the Supreme Court’s approval after the Torrent group, the winner of the first round, challenged the second auction conducted by the lenders of Reliance Capital. Torrent plea will be heard on October 11.
Bankers said the fresh demand will impact the valuation of the company. The Hinduja group had made a Rs 9,800 crore all-cash offer for the company.
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Reliance Capital was sent for debt resolution in November 2021 after the company defaulted on loans worth Rs 22,000 crore.
According to a legal source, RGIC received four SCNs from the DGGI, demanding GST payments of varying sums: Rs 478.8 crore, Rs 359.7 crore, Rs 78.6 crore, and Rs 5.4 crore respectively. These notices pertain to revenues generated from services such as re-insurance and co-insurance.
Emails sent to the company did not elicit a response.
A legal source said RGIC's auditors will need to set aside the fresh tax demand as a contingent liability in their September quarter results.
RGIC plays an important role within Reliance Capital, constituting nearly 70 per cent of the company's total value.
The first show cause notice of Rs 478.8 crore, was served to RGIC by the DGGI on September 28. It concerns the application of GST on re-insurance commission associated with re-insurance services ceded to various Indian and foreign reinsurance companies.
The GST authority's argument is that re-insurance commission should be regarded as part of the company's recorded revenue, thus necessitating GST payment.
Similarly, another SCN, totalling Rs 359.7 crore, was sent by the department on the same day.
This notice pertains to the applicability of the GST on co-insurance premiums received as a follower in co-insurance transactions. RGIC contends that the lead insurer has already discharged the GST liability on the entire premium, making it unnecessary for the company to pay GST on follower premiums.
However, the GST department asserts that the GST Act doesn't permit one registered entity to collect and disburse tax on behalf of another, irrespective of co-insurance arrangements.
For large insurance cover, co-insurance transactions involve the insured party spreading their risk among multiple insurers by allocating risk shares.
The insurer with the most significant risk coverage is termed the lead insurer, while others sharing the risk are known as participating co-insurers or followers.
The third SCN, totalling Rs 78.6 crore, revolves around an investigation initiated by the DGGI regarding the claiming of input tax credit (ITC) without underlying services related to marketing expenses from July 1, 2017, to March 31, 2022. In response, the company has deposited Rs 10.13 crore under protest concerning the ITC.
The fourth SCN addresses the non-payment of GST under reverse charge basis concerning the import of re-insurance services from foreign reinsurers in connection with an exempted crop insurance scheme from July 2017 to January 2018.
The GST authority has issued a tax notice amounting to Rs 5.38 crore in this particular matter.
