In its probe against insurance firms on alleged malpractices involving commission payments, the income tax (I-T) department sent notices to two large private banks last week, The Economic Times (ET) reported. However, the names of the two banks are not known yet.
According to the ET report, the initial probe that was against more than 20 insurance firms and around 500 entities linked to their sales agent has now shifted to banks due to unexplained voluminous transactions.
The tax department sent notices under Section 131 of the Income Tax Act and information pertaining to the manpower deployed by the banks seeking information on the mode of payments deployed, the report said. Section 131 allows IT authorities to conduct inquiries, summon individuals or witnesses, and ask for accounting records and other documents.
These insurance firms are being investigated by the I-T department for alleged tax evasion and malpractices. The direct tax department is probing tax evasion by these insurance companies through violation of the Insurance Regulatory and Development Authority of India (IRDAI) norms on commission payments.
The Directorate General of GST Intelligence (DGGI) is also investigating these insurance firms for alleged fake input tax credit claims.
Both the departments combined are investigating transactions worth over Rs 60,000 crores. GST evasion of more than Rs 5,500 crore is suspected.
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According to the ET report, these insurance companies were paying overriding commission to banks and other intermediaries along with the legal commission. This has raised concerns over likely exploitation and a rise in management expenses within the insurance industry.
The banks are suspected of having acted as corporate brokers for insurance companies.
The investigation has further revealed that these insurance companies, through the intermediaries, paid the manpower supply (also called payroll or employee) costs of the banks, the report said. Thus, these expenses were never reflected in the books and are likely a case of non-disclosure and severe violation under I-T laws.
Several employees have reportedly revealed in the probe that their work was to ensure that the overriding commission is paid through various routes and the transactions looked genuine.