Clarification on Taxability of Salvage/Wreck Value Earmarked in the Claim Assessment of Damage Caused to Motor Vehicles
The Ministry of Finance, through the Central Board of Indirect Taxes and Customs (CBIC), has issued a circular to clarify the taxability of salvage or wreck value in the context of motor vehicle insurance claims.
Insurance companies, providing general insurance services for motor vehicles, cover the costs of repairs or damages incurred by policyholders. These damages are classified into two categories:
- Total Loss/Constructive Total Loss or Cash Loss
- Partial Loss
Key Clarifications:
- GST Liability on Salvage/Wreck Value:
- Supply Under GST Law: For GST to be applicable, there must be a ‘supply’ as defined under section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act).
- Insurance Services: Insurance companies provide the service of insuring vehicles and charge premiums. Their responsibility includes repairing the damaged vehicle or compensating the insured for the damage, as per the policy terms.
- Deduction of Salvage Value:
- Pre-Agreed Deductibles: Any deduction made by the insurance company from the final claim amount is a pre-agreed deductible between the insured and insurer.
- Ownership of Salvage: When an insurance claim is settled by deducting the salvage value, the ownership of the wreckage remains with the insured. The insured can dispose of the wreckage as they choose.
- GST Implications:
- No GST on Salvage Deduction: If the insurance company deducts the salvage value from the claim amount, there is no GST liability on the insurance company, as the salvage does not constitute a supply by the insurance company.
- Full IDV Claims: In cases where the insurance company settles the claim for the full Insured’s Declared Value (IDV) without deducting salvage value, the salvage becomes the property of the insurance company. In such cases, the insurance company must discharge GST on the disposal of the salvage.
| S.No. | Issue | clarification |
|---|---|---|
| 1 | Whether the insurance company is liable to pay GST on the salvage/wreckage value earmarked in the claim assessment of the damage caused to the motor vehicle? | Under GST law, supply is the relevant taxable event for levying tax. For an activity/transaction to be liable to GST, existence of ‘supply’ as defined under section 7 of CGST Act should be there. |
| 2.1 | Section 7 of 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 service of insuring the vehicle/automobile for any damages and in return, charging consideration in the form of premium charged from the owner of the vehicle. It is also noted that in 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. |
| 2.2 | 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 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 sourcing of competitive quotes from various salvage/wreckage buyers and the insured may select the best available offer for sale of wreckage or damaged car. The insured may also source quotes from open markets and dispose 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 by the insured either directly, or through the garage, or may not be disposed 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 consideration for any supply being made by insurance company. Accordingly, in such cases, there does not appear to be any supply of salvage by insurance company and as such, there does not appear to be any liability under GST on the part of insurance company in respect of this salvage value. |
| 2.3 | However, in situations where the insurance contract provides for settlement of claim on full IDV, without deduction of value of salvage/wreck, the insured will be paid for full claim amount without any deductions on account of salvage value. In such a situation, the salvage becomes the property of 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. |
| 3 | 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 insured and insurance companies are not liable to discharge GST liability on the same. However, in cases where the insurance claim is settled on full claim amount, without deduction of 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. |
Visit www.cagurujiclasses.com for practical courses
