GST on Motor Vehicle Insurance Claims

Every car and two-wheeler owner needs to spend on a few recurring expenses, regardless of how often they use their vehicles. Motor vehicle insurance is one of them. In recent years, premiums for motor vehicle insurance have gone up. Many attribute this increase to higher GST rates. There also needs to be more clarity about the applicability of GST to motor vehicle insurance claims. 

This article explains all the details about GST's implications for motor vehicle insurance premiums, claims, and salvage value. Stay with us. 

GST on vehicle insurance

Insurance is a legal agreement to protect an entity against pre-specified financial losses. It’s a type of service that an insurer provides in exchange for payment of an insurance premium. Anyone willing to have such protection can buy it by paying the premium. 

For this reason, the GST Act recognises insurer-insured transactions as a trade in services. 

Earlier, people purchasing any insurance needed to pay service tax. The applicable service tax rate on motor vehicle insurance was 15%. 

Since its introduction in 2017, GST has replaced service tax. The latest GST rate on motor vehicle insurance coverage is 18%, which is 3% higher than the previously levied service tax rate. 

Example:

Mr. X bought a brand new car for ₹6,00,000. He purchases vehicle insurance from ABC Insurance at an Insured’s Declared Value (IDV) of ₹6,00,000 for the car. The premium for the insurance is ₹ 15,000. 

As per the GST Act, vehicle insurance premiums attract GST at 18%. 

• So, Mr. X will need to pay {Vehicle Insurance Premium + (Vehicle Insurance Premium * 18%)} or ₹17,700. 
• The GST Mr. X pays on his purchased vehicle insurance premium is (₹17,700 - ₹15,000) or ₹2,700. 

Is ITC available for GST on motor vehicle insurance premiums? 

ITC, or Input Credit Tax in GST, is the tax credit that a business can claim while selling their goods and services for the GST they have paid while purchasing inputs for production. 

• Motor vehicle insurance for commercial vehicles is eligible for ITC under the GST Act. 
• Motor vehicle insurance on private passenger vehicles is not eligible for ITC.

GST on motor vehicle insurance claims

Claims on an active motor vehicle insurance policy are legally enforceable by the insured or the policy owners. The claim aims to recover the financial loss the insured has suffered as per the pre-specified terms and conditions of the insurance policy.

Such claims are actionable claims as per the GST Act.

Paragraph 6 of Schedule III of the GST Act states that such an actionable claim cannot be treated as a sale of goods or services. So, GST is not applicable to the payment recovered through motor vehicle insurance claims. 

Example: 

While driving his car, Mr. X hit a wall and damaged his car. He had his car repaired at a workshop at an expense of ₹15,000. Mr. X filed a claim on his motor vehicle insurance, which he purchased from ABC Insurance. After due inspection, the insurer reimbursed the repairing costs of ₹15,000. 

• Mr. X will not need to pay any GST on the reimbursement he received from the insurer. 

GST on salvage value in motor insurance claims

As per motor vehicle insurance parlance, salvage value means the value an insurer can recover from selling a completely damaged or destroyed vehicle while settling the insurance claim on the vehicle. 

The Central Board of Indirect Taxes and Customs (CBIC) issued the clarification in respect of the taxability of salvage/ wreck value earmarked in the claim assessment of the damage caused to the motor vehicle in its recent circular no.-215/9/2024-GST dated 26 June 2024.

Example: 

Mr. X's vehicle suffered an accident, and the damages made the car beyond repair. He claims to recover the car's value from the insurer as per the IDV in the insurance policy. Here, the IDV was ₹ 6,00,000. 

After due inspection and assessment, the insurer agrees to pay Mr. X the Insured's Declared Value or IDV of the car. The insurer can settle the claim in two different ways.

• 1st process - The insurer can transfer the claimed value to Mr. X’s account without deducting the salvage value of the damaged car and take possession of the car. It makes the damaged vehicle the insurer’s property. 
• 2nd process - Alternatively, the insurer can transfer the claimed amount to Mr. X after deducting the salvage value of the vehicle, and settle the claim. In this situation, the ownership of the damaged or destroyed vehicle remains with the insured or Mr. X. 

The applicability of GST on salvage value in motor insurance claims will differ depending on the claim settlement process. 

1. Suppose the insurer takes possession of the vehicle and disposes of it later. In that case, it will need to bear the outward GST on the salvage value. 
2. Suppose the insurer settles the claim after deducting the salvage value. In that case, the insurer will not have any GST implications for the salvage value.

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