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.
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.
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.
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.
FAQs
Q1. 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.
Q2. Is GST payable on insurance claims received?
GST is not payable on insurance claims received by the insured.
Q3. Can we claim GST on vehicle insurance?
As per Section 17(5), the GST Act does not allow claiming an input tax credit for GST on motor vehicle insurance for passenger vehicles with a capacity of less than 13 passengers.
