Insurance Industry Faces GST Commission Tax Dispute

Insurance Companies Navigate Legal Waters Amidst GST Commission Tax Demand

In a bid to resolve a looming tax conundrum, insurance companies are contemplating legal action regarding a tax demand related to commissions paid for co-insurance. The industry seeks clarity from the courts, arguing that subjecting these commissions to Goods and Services Tax (GST) would entail double taxation. With a combined tax demand totaling ₹12,000 crore, insurers were hopeful for clarification at the upcoming GST Council meeting. However, with no meeting anticipated until the formation of the new government and a looming March 31 deadline to settle the tax issue, insurance firms are gearing up to file a writ petition by the end of this month, as per sources cited by ET.

Co-insurance Mechanisms and GST Implications

Co-insurance mechanisms enable policyholders to spread their risk across multiple insurers, with a lead insurer and one or more co-insurers sharing the risk, particularly in high-risk scenarios. The industry contends that since GST on the entire insurance premium, including the co-insurers’ portion, is already covered by the lead insurer, imposing an additional tax demand would amount to double taxation, contravening established legal principles. Last September, ET initially reported that the Directorate General of Goods and Services Tax Intelligence (DGGI) had issued tax demand notices to ICICI Lombard and six other insurers for failure to remit GST on reinsurance premiums despite earning commissions from co-insurance, extending these notices industry-wide.

Industry-wide Challenges and Engagement with Authorities

Presently, over 20 insurance companies are grappling with similar demands for the period spanning from July 2017 to March 31, 2022. The General Insurance Council, the apex body representing the industry, has engaged with the finance ministry, which indicated on February 19 that the matter would be expeditiously addressed. Nonetheless, in the absence of a GST Council meeting until July and the looming payment deadline, concerns linger that the DGGI may resort to freezing accounts, adding to the urgency of the situation.