GST Taxability of Salvage Value in Motor Vehicle Insurance Claims

The Ministry of Finance issued Circular No. 215/9/2024-GST on June 26, 2024. This circular provides essential clarifications on the taxability of salvage or wreck value in motor vehicle insurance claims. Understanding these clarifications is crucial for both insurance companies and policyholders regarding their GST obligations. Here’s an overview of the key points:

Definitions and Context

Under GST law, supply is the taxable event for levying tax. Section 7 of the CGST Act defines supply to include all forms of goods or services made for a consideration in the course of business. Insurance companies provide the service of insuring vehicles against damages and charge a premium for this service.

Types of Loss Situations

The circular distinguishes between two types of loss situations in motor vehicle insurance:

• Total Loss/Constructive Total Loss: Insurance companies consider the vehicle a total loss. The insurance company’s liability is generally limited to the Insured’s Declared Value (IDV) of the vehicle minus the salvage value.
• Partial Loss: The vehicle is partially damaged. The insurance company compensates for the repair costs minus any deductibles agreed upon in the insurance contract.

Key Clarifications

Ownership of Salvage:

• Deduction of Salvage Value: If the insurance contract includes a deduction of salvage value from the claim amount, the salvage remains the property of the policyholder. Therefore, the insurance company is not liable for GST on this salvage value.
• Full Claim Settlement: If the insurance company settles the claim for the full IDV without deducting the salvage value, the salvage becomes the property of the insurance company. In such cases, the insurance company must discharge GST on the disposal or sale of the salvage.

Policy Contract Terms: The insurance contract terms play a crucial role in determining GST liability. The contract should clearly state whether the salvage value is to be deducted or if the full claim amount will be paid.

Practical Implications

For Policyholders: It is important to understand the terms of your insurance contract, particularly regarding salvage value deductions. This will determine whether you retain ownership of the salvage and your GST obligations.

For Insurance Companies: Ensure compliance with GST provisions based on the ownership and disposal of salvage. Clear documentation and understanding of the insurance contract terms are essential to avoid any GST liabilities.

Conclusion

Circular No. 215/9/2024-GST aims to ensure uniformity in the application of GST laws across various regions. It provides clear guidelines on the taxability of salvage value in motor vehicle insurance claims. By following these clarifications, stakeholders can ensure compliance and avoid potential GST-related issues.

For more information please refer below circular :

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This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.

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