Service Tax Fraud
When a customer walks into a car showroom, he usually has no particular preference regarding the company to insure his car with. The dealer often guides the customer. Insurance companies pay dealers for this guidance in the form of commission. Insurers also pay dealers the cost of advertisements for their showrooms as well as other such incentives.
These incentives are taxable items under service tax and the insurance paperwork is maintained by motor vehicle dealers. While insurance companies claim tax credit for the service tax paid to automobile dealers, Directorate General of Central Excise Intelligence officials allege that the dealers have not provided most of the services the insurance companies claimed credit for to reduce their service tax dues.
The dispute could hit general insurance companies hard if they are forced to recalibrate their service tax dues. The liabilities for larger companies run into several hundred crores each. The demand could also impact the plans of some of these companies to attract higher foreign investment of up to 49 per cent, allowed by the government this year through an amendment of the Insurance Act.
While tax officials have also checked the records of the public sector insurance companies, since they also sell motor policies, a government source said it was for purposes of corroboration only. The latest development could be a dampener for the general insurance industry, which has been struggling to break even. In the race to gather the maximum premium, the comprehensive cover in the motor insurance business is the most profitable bulk segment, and all leading companies have established huge networks with motor vehicle companies.