India's tax authority has sent Bajaj Allianz Life Insurance and ICICI Prudential Life Insurance show-cause notices for evading taxes since 2017, as part of a probe spanning 16 insurers and about $610 million in unpaid dues, three sources said.

The probe, started in September last year, is a crackdown on the insurance industry's practice of accounting for all sales commissions above the regulator-prescribed limit as advertising and marketing costs, and then claiming tax credit, two of the sources said.

Tax authorities estimate that 16 insurance companies in all owe the government about 50 billion rupees ($610 million) in unpaid taxes, interest and penalties since July 2017, when India implemented goods and services tax (GST), two sources said.

India's Directorate General of Goods and Services Tax Intelligence (DGGI) is in the process of sending show-cause notices to other insurance companies as well, said two sources, including a government official.

Bajaj Allianz, ICICI Prudential and India's finance ministry did not respond to Reuters' request for comment. All the sources asked not to be named as they are not authorised to speak to the media.

However, the case could be without merit if the industry regulator–the Insurance Regulatory and Development Authority of India (IRDAI)–backdates a new rule around commissions.

The IRDAI has, effective April 1, removed separate limits for commissions and has imposed an overall ceiling on operating expenses and commissions.

The insurance industry is asking the regulator to make this change retrospectively, two sources said. If that happens, the case will no longer hold ground, the sources added.

As part of its probe, the tax authorities have also questioned some banks that, as corporate agents, sell insurance policies to their customers, to establish the practices being followed by insurance companies.

These include banks that have bancassurance partnership with ICICI Prudential and Bajaj Allianz, said the third source.

However, since banks pay tax on services they avail by issuing bills, they may not be dragged further into the investigation, said the third source. ($1 = 82.0250 Indian rupees) (Reporting by Nikunj Ohri; Editing by Dhanya Ann Thoppil and Savio D'Souza)