Tax department probes over 20 insurers over breach of expense limits

The Income Tax Department is looking into over 20 insurance companies they to see if that have breached regulatory Expense of Management (EoM) limits over the past two fiscal years, according to people familiar with the development.

The move could impact five to six life insurers and as many as 15 general insurers, including standalone firms such as Niva Bupa Health Insurance and GoDigit General Insurance.

To be clear, no notices have been sent as yet.

These insurance companies under the scanner either overshot their regulatory expense limits or failed to provide sufficient explanations for cost overruns. Notices are expected to land in the coming weeks, with tax implications likely if companies are unable to justify the expenditures post change in norms by IRDAI in April 2023, sources in the know added. The income tax scrutiny follows 2022 notices by the DGGI to around 20 general insurance companies operating in SEZs, alleging unpaid dues of ₹2,000 crore. Similarly, life insurers have been facing a huge tax battle with the GST authority for allegedly issuing invoices without rendering actual services, with the adjudicating authority concluding that transactions were not actual.

HDFC Life, for instance, is facing ₹5,500 crore tax notice for 2017-2022. Similarly, others including ICICI Prudential Life have also allegedly routed excessive commission payments to corporate agents under the guise of advertising expenses through marketing vendors.

Following these tax notices, IRDAI, in April 2023 removed product-specific commission caps, putting an overall cap on expenses. This led to a jump in commissions paid by life insurers by 22% year-on-year in FY24 to ₹51,524 crore, while those by general insurers nearly doubled to ₹39,600 crore, according to IRDAI's annual report.

About half of those companies are yet to limit their EoMs to 30% or 35% that the regulator has stipulated. The regulator has asked for a clear roadmap every quarter in terms of what is their plan to achieve the numbers within that limit of 30% or 35%.

Listed Niva Bupa had reported expense of management ratio of 37.4% for FY25, which is 190 basis points above the allowable expense ratio of 35.5% considering 35% and some allowances on insure tech. The company has given a glide path in achieving EOM norm.

While Go Digit has been able to reduce expense ratio to 33.4% in FY25 against 36.3% in FY24, it is still above the regulatory requirement of 30%.

"Now, IRDAI obviously would be very serious about this, and this is my personal opinion, that I would expect IRDAI to take some corrective actions on EOM so that they can actually achieve the objective of lower commissions," said Kamesh Goyal, founder Go Digit Insurance, during an investor call in May. "So, we are on the path of reducing EOM, and the reduction has been decent. But the industry's trend is otherwise, especially with 1/n, and a lot of companies would actually be seeing an increase in EOM, bigger or smaller ones both."