Clarification on taxability of salvage/ wreck value earmarked in the claim assessment of the damage caused to the motor vehicle

27Jun 2024 by admin

Circular No.: 215/9/2024-GST
Date: 26th June, 2024
Subject: Clarification on taxability of salvage/ wreck value earmarked in the claim assessment of the damage caused to the motor vehicle

Key Points and Clarifications:

Background:

This circular addresses the issue of whether the salvage or wreck value earmarked in the claim assessment for damage caused to a motor vehicle is subject to Goods and Services Tax (GST). Insurance companies, which provide general insurance services for motor vehicles, need clarity on the tax implications when they account for the salvage value during claim settlements.

Key Provisions Involved:

  • Section 7 of the CGST Act, 2017: Defines “supply” for the purposes of GST.
  • Section 168(1) of the CGST Act, 2017: Empowers the Board to issue instructions and directions to GST officers to ensure uniformity in the implementation of the Act.

Issues and Clarifications:

Issue 1: GST Liability on Salvage/Wreck Value in Motor Vehicle Insurance Claims

  • Concern: Whether insurance companies are liable to pay GST on the salvage or wreck value earmarked in the claim assessment when a motor vehicle is damaged.
  • Clarification:
    • No GST on Salvage Value Deducted from Claim Settlement:
      • If the insurance policy contract specifies that the insurance company’s liability is limited to the Insured Declared Value (IDV) of the vehicle less the salvage value, the salvage remains the property of the insured.
      • The deduction of salvage value from the insurance settlement amount does not constitute a supply by the insurance company, and thus, no GST is applicable on this salvage value.
    • GST on Salvage Value When Full IDV is Settled:
      • If the insurance contract stipulates that the insurance claim is settled at full IDV without deducting the salvage value, the salvage becomes the property of the insurance company.
      • In such cases, the insurance company is liable to pay GST on the sale or disposal of the salvage.

Key Points from Circular:

  1. Nature of Supply and Salvage Value:
    • Definition of Supply: Section 7 of the CGST Act defines supply to include all forms of supply of goods or services made or agreed to be made for a consideration by a person in the course or furtherance of business.
    • Insurance Services: Insurance companies provide services by insuring motor vehicles against damages, charging a premium as consideration. They are responsible for either repairing the vehicle or compensating the insured for damages covered under the policy terms.
  2. Deduction of Salvage Value:
    • Policy Contract Terms: If the policy contract limits the insurance company’s liability to the IDV less the salvage value, the ownership of the salvage remains with the insured.
    • No Supply by Insurance Company: In this scenario, since the salvage remains the insured’s property and the deduction is part of the settlement terms, it does not constitute a supply by the insurance company. Hence, no GST is applicable.
  3. Full Settlement of IDV:
    • Ownership of Salvage: When the insurance company settles the claim at full IDV without deducting salvage value, the salvage becomes the property of the insurance company.
    • GST Liability: The insurance company must discharge GST on the sale or disposal of the salvage, as it constitutes a supply of goods by the insurance company.

Tabular Summary

IssueClarification
GST liability on salvage/wreck value in motor vehicle insurance claimsNo GST liability if salvage value is deducted from claim settlement as per policy terms. GST applicable if salvage becomes property of insurance company after full claim settlement.