GST and ITC in case of Vehicle Insurance companies

All vehicle owners, whether of cars or two-wheelers, must cover several recurring costs, regardless of how frequently they use their vehicles. One of these costs is motor vehicle insurance.

This article provides a comprehensive explanation of GST on motor vehicle insurance premiums, claims, and salvage value.

Is GST applicable on Vehicle Insurance premiums?

An insurance premium is the amount paid by the person for availing of an insurance policy. In GST, Insurance is a service. Therefore, GST is levied on Insurance premiums @ 18%.

For example, Mr. A bought a brand new car for Rs. 6,00,000. He purchased vehicle insurance for which the insurance premium – base amount is Rs. 20,000. He has to finally pay Rs. 20,000 plus Rs. 3,600 (18% GST on 20000) i.e. total Rs. 23,600.

Is ITC available on Vehicle Insurance premiums?

As per clause (ab) of Section 17(5) of the CGST Act, 2017, GST on services of general insurance, servicing, repair, and maintenance in so far as they relate to motor vehicles up to 13 seating capacity is blocked credit. Therefore, ITC on such Vehicle Insurance premiums can not be claimed.

However, if the motor vehicle has more than 13 seater approved capacity, ITC can be claimed. 

Also, if a motor vehicle up to 13 seater capacity is used in the business of further supply of such motor vehicles or transportation of passengers or imparting training on driving such motor vehicles, ITC can be claimed.

Is GST applicable on the Vehicle Insurance claims received?

An insurance claim is a formal request to your insurance provider for reimbursement against losses covered under your insurance policy. You get reimbursement for the expenses incurred for vehicle damage when your claim is sanctioned.

Such claims are actionable claims as per the GST Act. As per Schedule III of the CGST Act, 2017, actionable claims cannot be treated as a sale of goods or services.  Therefore, GST is not applicable on vehicle insurance claims received.

Is GST applicable on salvage value claims under Vehicle Insurance?

In vehicle insurance, salvage value is the value of a vehicle that is beyond repair and can be sold to a salvage yard. Salvage value refers to the value of damaged or destroyed property that can be deducted from the claim settlement.

The insurance companies, which are engaged in providing general insurance services in respect of insurance of motor vehicles, insure the cost of repairs/ damages of motor vehicles incurred by the policyholders. Such damages to the insured vehicle are classified in two categories:

1. Total Loss/ Constructive Total Loss or Cash Loss; and
2. Partial Loss Situation

In the case of a total loss situation, the insurance company's liability to pay the insured is limited to the Insured's Declared Value (IDV) of the vehicle less the value of salvage/ wreck in cases of total loss to the vehicle. However, in some cases, the Insurance company keeps the damaged vehicle itself and pays the full value of the claim to the policyholder. In this case, the Insurance company can sell the damaged vehicle by itself and recover the value of salvage.

CBIC has issued Circular No. 215/9/2024 dated 26.06.2024 regarding the applicability of GST on the taxability of salvage/ wreck value earmarked in the claim assessment of the damage caused to the motor vehicle. It has explained the matter as follows:

“Under GST law, supply is the relevant taxable event for levying tax. For an activity/transaction to be liable to GST, the existence of 'supply' as defined under section 7 of the CGST Act should be there.

Section 7 of the CGST Act defines supply to mean 'all forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business.' In the instant case, insurance companies are providing the service of insuring the vehicle/ automobile for any damages and in return, charging consideration in the form of a premium charged from the owner of the vehicle. It is also noted that with respect of insurance services being provided by the insurance companies, it is the responsibility of the insurance company to get the damaged vehicle repaired or to compensate the insured person against the damage caused to the vehicle, to the extent covered under the terms of the insurance.

Any Deduction made by the insurance company from the final claim amount paid to the insured is in the form of deductibles which is pre-decided and mutually agreed by the insured and the insurer while signing the insurance contract. In cases where as per the policy contract, the insurance company's liability to pay the insured is limited to the Insured's Declared Value (IDV) of the vehicle less the value of salvage/ wreck in cases of total loss to the vehicle, if the insurance claim is settled by the insurance company as per the terms of the insurance contract by deducting value of salvage/ wreckage from the claim settlement amount, the salvage/ wreckage does not become property of insurance company, and the ownership for such wreckage/ salvage remains with the insured. 

However, in some cases, the insurance company may support the sourcing of competitive quotes from various salvage/ wreckage buyers and the insured may select the best available offer for the sale of a wreckage or damaged car. The insured may also source quotes from open markets and dispose of the wreckage or damaged car to such a buyer. In any case, the ownership of the wreckage vests with the insured and not with the insurance company. The same can be disposed of by the insured either directly, or through the garage, or may not be disposed of at all, as per his wish and choice. 

The deduction of the value of salvage from the insurance settlement amount is as per the terms of the insurance contract, and cannot be said to be a consideration for any supply being made by an insurance company. Accordingly, in such cases, there does not appear to be any supply of salvage by an insurance company and as such, there does not appear to be any liability under GST on the part of an insurance company in respect of this salvage value.

However, in situations where the insurance contract provides for settlement of the claim on full IDV, without deduction of the value of salvage/ wreck, the insured will be paid for the full claim amount without any deductions on account of salvage value. In such a situation, the salvage becomes the property of the Insurance Company after settling the claim for the full amount and the insurance company is obligated to deal with the same or dispose of the same. In such cases, the outward GST liability on disposal/sale of the salvage is to be discharged by the insurance companies.

Therefore, in cases where due to the conditions mentioned in the contract itself, general insurance companies are deducting the value of salvage as deductibles from the claim amount, the salvage remains the property of the insured, and insurance companies are not liable to discharge GST liability on the same. 

However, in cases, where the insurance claim is settled on the full claim amount, without deduction of the value of salvage/ wreckage (as per the terms of the contract), the salvage becomes the property of the insurance company and the insurance company will be obligated to discharge GST on supply of salvage to the salvage buyer.

Conclusion

Navigating the intricacies of GST and Input Tax Credit (ITC) in the context of vehicle insurance can be challenging for insurance companies and policyholders alike. The application of GST to insurance premiums, the availability of ITC, and the taxability of insurance claims and salvage values all hinge on specific provisions within the CGST Act, 2017, and the terms of the insurance contract.

Understanding these nuances is crucial for both compliance and optimizing the financial implications of motor vehicle insurance. By staying informed and adhering to the guidelines, insurance companies can ensure proper GST application, while policyholders can better understand the costs and credits associated with their vehicle insurance. As the regulatory landscape evolves, keeping abreast of updates, such as those provided by the CBIC, will be essential for accurate GST compliance and effective financial planning in the realm of motor vehicle insurance.

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