GST Implications on Insurance Claim Received on Loss of Stock or Capital Assets

Many times, the entities get insurance of their stock/capital assets to indemnify themselves from future uncertain and unfavorable events like theft, flood, fire, or any other reason. In this write-up, we will understand the following: –

Is ITC available on a premium paid for insurance of stock/capital assets?

Whether the amount received as an insurance claim on account of destroyed stock/capital assets is taxable under GST?

Whether an insurance claim will be received for the portion of ITC reversal that had been availed at the time of purchase of the said stock/capital assets?

Is ITC available on a premium paid for insurance of stock/capital assets?

Stock:-

ITC on premium paid for Insurance for the loss of stock will always be available since it is used for business purposes.

Motor Vehicle:-

As per Section 17(5) of the CGST Act, 2017 broadly ITC is blocked on motor vehicles (having seating capacity ≤ 13 persons (including driver), vessels, and aircrafts used for passenger transportation with certain exceptions. The Exceptions are as under: –

• Making further taxable supply of such motor vehicles
• Making taxable supply of transportation of passenger
• Making taxable supply of imparting training on driving such motor vehicles

Further, ITC is also blocked on certain services relating to motor vehicles, vessels, and aircraft namely, insurance, servicing, and repair and maintenance. So, the basic principle is that the motor vehicles, aircraft, and vessels on which ITC is blocked, the ITC on Services of insurance, servicing and repair, and maintenance about such motor vehicles, vessels, and aircraft is also blocked.

Plant and Machinery:-

ITC on premium paid for insurance for loss of plant and machinery will also be available if it is used for business purposes. However, in real-life plants and machinery are generally used for business purposes. So ITC will be available.

Whether the amount received as an insurance claim on account of destroyed stock/capital assets is taxable under GST?

As per section 2(52) of the CGST Act, 2017 every kind of movable property other than money and securities but including actionable claims is covered within the definition of ‘’goods’’.

As per Para 6 of Schedule III to the GST Act, actionable claims other than lottery, betting, and gambling are treated as neither supply of goods nor supply of services.

The term ‘’Actionable Claim” shall have the same meaning as assigned to it in Section 3 of the Transfer of Property Act, 1882. As per Section 3 of the Transfer of Property Act, 1882 ‘Actionable Claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.’

In the Union of India v. Sarada Mills (1972) case, the Hon’ble Supreme Court held that the actionable claim would include a right to recover insurance money. Hence, an actionable claim includes an amount due under a policy of insurance.

On a conjoint reading of the above paragraphs, it is concluded that an insurance claim received on account of damage to stock/capital assets is the actionable claim, and therefore it is treated neither as the supply of goods nor supply of services, thereby not taxable under GST.

Whether an insurance claim will be received for the portion of ITC reversal that had been availed at the time of purchase of the said stock/capital assets?

In case of flood claims, fire claims or theft claims w.r.t. damaged/ stolen stocks/capital assets, assessment of loss of stock/capital assets is done excluding GST because in most cases at the time of purchase, the ITC has been availed and the same is accounted for in the books and reflected in GST returns. Hence, the insured entity gets the claim for loss excluding GST. Insured does not reverse the GST as the claim is exclusive of GST. However, the GST Department issues notice to the insured entity to reverse the ITC on stocks that are damaged/lost, and then the insured entity is bound to pay tax. At that point in time, it claims GST so paid from the insurance company in addition to the loss assessed. The insurance company then asks for GST returns with reversal of GST in books and returns and also a certificate from Chartered Accountant to sanction GST claim.

Generally, the insurance company will indemnify the insured with the value of a stock before the loss. Suppose the taxable value of the stock is ` 100/- and GST charged is ` 18/- the insured would have taken ITC of ` 18/-. However, as per section 17(5)(h) (goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples), the insured is required to reverse the ITC of ` 18/-. Since ITC is not eligible as per the above provision, the same becomes the cost of the stock lost. Hence, the total loss of stock is ` 118/- and the insurance company has to compensate ` 118/-. However, the insurance company may want to ensure whether the ITC involved in the loss of stock has been reversed to validate the exact value of the loss of stock. For this purpose, the insurance company requires the insured to get a CA certificate confirming that ITC has been reversed in the books and GST returns though there is no express requirement for the insured to get a CA certificate as per the CGST Act, 2017 or rules made thereunder.