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Published on:
February 20, 2023
By
Paramita

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

With the introduction of Goods and Services Tax (GST) in India, there have been significant changes in the way businesses operate. Insurance claims received on loss of stock or capital assets is one such area where GST has implications. In this article, we will discuss the impact of GST on insurance claims received on loss of stock or capital assets.

Understanding GST on Insurance Claims Received

Before we dive into the implications of GST on insurance claims, let's understand what GST is. GST is a comprehensive indirect tax levied on goods and services consumed in India. It has replaced multiple taxes, including central excise duty, service tax, value-added tax (VAT), and octroi.

When it comes to insurance claims, it is crucial to understand the difference between the terms 'indemnity' and 'non-indemnity.' An indemnity claim is when the insurance company covers the actual loss suffered by the insured party. In contrast, a non-indemnity claim is when the insurance company covers the estimated loss suffered by the insured party.

Under GST, insurance companies are required to pay a 5% tax on the premium collected for policies issued before July 1, 2017. For policies issued on or after July 1, 2017, GST is charged at a rate of 18%.

When an insurance claim is received on loss of stock or capital assets, the GST implications depend on whether the claim is indemnity or non-indemnity.

Indemnity Claims

For indemnity claims, GST is not applicable on the claim amount since the insurance company is only reimbursing the actual loss suffered by the insured. However, if the insurance company charges any administrative fees, such as processing fees or claim settlement fees, then GST is applicable on the fees charged.

For example, if the insured party has suffered a loss of Rs. 1,00,000 and the insurance company settles the claim for the same amount, then no GST is applicable on the claim amount. However, if the insurance company charges a processing fee of Rs. 5,000, then GST is applicable on the processing fee.

Non-Indemnity Claims

For non-indemnity claims, GST is applicable on the claim amount since the insurance company is not reimbursing the actual loss suffered by the insured. Instead, the insurance company is settling the claim based on an estimated loss suffered by the insured.

For example, if the insured party has suffered a loss of Rs. 1,00,000 and the insurance company settles the claim for Rs. 80,000, then GST is applicable on the claim amount of Rs. 80,000.

Impact of GST on Insurance Claims on Loss of Stock or Capital Assets

The introduction of GST has led to a change in the way insurance claims for loss of stock or capital assets are settled. Previously, under the erstwhile tax regime, service tax was applicable on the processing fees charged by insurance companies.

However, under GST, the tax rate has increased from 15% to 18%, leading to a rise in the cost of insurance policies. Additionally, the increased tax rate has also led to an increase in the processing fees charged by insurance companies, which is ultimately borne by the insured party.

Another significant impact of GST on insurance claims for loss of stock or capital assets is the increased compliance burden on businesses. Businesses are required to report insurance claims received on loss of stock or capital assets in their GST returns. Failure to do so can attract penalties and interest.

Conclusion

GST has significant implications on insurance claims received on loss of stock or capital assets. It is essential for businesses to understand the impact of GST on their insurance claims and comply with the necessary regulations.

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Updated on:
March 16, 2024