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

GST Adjudicating Authority upheld a tax demand of Rs 2,400 crore against HDFC Life Insurance, which could set a precedence for others in the insurance industry

The Indian insurance industry is bracing for extended legal scrutiny from tax authorities after the goods and services tax (GST) Adjudicating Authority upheld a tax demand of Rs 2,400 crore against HDFC Life Insurance. The ruling, stemming from allegations of wrongful claims on input tax credit (ITC) related to agent commissions, could set a precedent that pushes the industry’s total tax liability beyond Rs 5,500 crore, according to a report by The Economic Times.

 

The Directorate General of GST Intelligence (DGGI) has been investigating nearly 30 insurance companies for allegedly misusing ITC, a mechanism that allows businesses to reduce their GST liability by claiming credit on taxes paid for input services or goods. The probe led to the issuance of multiple show cause notices, questioning tax credits amounting to over Rs 5,500 crore.

   

HDFC Life challenges tax demand

In a recent filing with stock exchanges, HDFC Life disclosed that the GST Adjudicating Authority had issued a revised order, covering the period from July 1, 2017 to March 31, 2022. The order demands a total payment of Rs 2,422 crore, including penalties. The insurer, however, stated that it plans to file a rectification application, arguing that the penalty amount has been ‘erroneously enhanced’.

 

During the investigation, HDFC Life had already deposited Rs 250 crore with the GST department as a precautionary measure.

 

Allegations of misuse of marketing expenses

The tax department's case against HDFC Life is built on findings from the DGGI probe, which alleges that the insurer exceeded regulatory commission limits by funnelling extra payments through intermediary vendors, falsely labelling them as marketing expenses. The department contends that invoices were generated for services that were never actually provided.

 

The Adjudicating Authority examined internal company documents, including spreadsheets, linking these payments to commission payouts. It rejected HDFC Life’s defence that it had legitimately claimed ITC based on proper invoices, concluding that the transactions were fabricated and lacked any real supply of goods or services.

 

Regulatory implications

The ruling highlights how HDFC Life allegedly directed payments above permitted commission levels to corporate agents through marketing vendors. Statements from company personnel reportedly confirmed that invoices were raised for promotional activities such as online banners, email campaigns, and display standees – activities that were never actually executed but were used as a cover for additional commission payments.

 

With this decision potentially influencing cases against other insurers, the industry now faces heightened regulatory scrutiny.