After HDFC Life, insurers brace for Rs 5,500 cr GST demands amid scrutiny

The Indian insurance sector is preparing for prolonged legal examination by tax authorities following the goods and services tax (GST) Adjudicating Authority’s validation of a tax claim of Rs 2,400 crore against HDFC Life Insurance. The decision, arising from accusations of improper claims on input tax credit (ITC) concerning agent commissions, might establish a benchmark that could elevate the industry’s overall tax responsibility past Rs 5,500 crore, as per a report.

The Directorate General of GST Intelligence (DGGI) has been examining around 30 insurance firms for purportedly abusing ITC, a system that enables companies to lessen their GST obligations by claiming credits on taxes paid for input services or products. The investigation resulted in the distribution of several show cause notices, challenging tax credits exceeding Rs 5,500 crore.

In a recent submission to stock exchanges, HDFC Life revealed that the GST Adjudicating Authority had released a new order, pertaining to the timeframe from July 1, 2017 to March 31, 2022. The directive requires a complete payment of Rs 2,422 crore, comprising penalties. The insurer, nonetheless, indicated that it intends to submit a rectification application, claiming that the penalty amount has been ‘wrongly increased’.

Throughout the inquiry, HDFC Life had previously submitted Rs 250 crore to the GST department as a safeguard. The tax authority’s case against HDFC Life is based on evidence from the DGGI investigation, which claims that the insurer surpassed regulatory commission thresholds by channeling additional payments through intermediary vendors, misrepresenting them as marketing expenses. The department argues that bills were issued for services that were not truly rendered.

The Adjudicating Authority reviewed internal corporate documents, such as spreadsheets, connecting these payments to commission distributions. It dismissed HDFC Life’s argument that it had rightfully claimed ITC with valid invoices, determining that the transactions were fraudulent and did not involve any actual provision of goods or services.

The decision underscores how HDFC Life purportedly funneled payments exceeding allowed commission rates to corporate agents via marketing vendors. Reportedly, statements from company staff affirmed that invoices were issued for promotional efforts like online banners, email campaigns, and display standees—actions that were never carried out but served as a pretext for extra commission disbursements. With this ruling possibly impacting cases involving other insurers, the sector now confronts increased regulatory examination.