CBIC Clarification On Taxability Of Salvage Wreck Value In Claim Assessment Of Motor Vehicles

The Central Board of Indirect Taxes and Customs (CBIC) has clarified on the taxability of salvage/wreck value earmarked in claim assessment of damage caused to motor vehicles.

The Board has received the representations from the trade and field formations seeking clarification as to whether in case of motor vehicle insurance, GST is payable by the insurance company on salvage/ wreckage value earmarked in the claim assessment of the damage caused to the motor vehicle.

The insurance companies, which are engaged in providing general insurance services in respect of insurance of motor vehicles, insure the cost of repairs/ damages of motor vehicles incurred by the policyholders. The damages to the insured vehicle are classified in two categories namely total loss/ constructive total loss or cash loss; and partial loss situation.

The Board has clarified that 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 of 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. It can be disposed of by the insured either directly, or through the garage, or may not be disposed of 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 the insurance company. Accordingly, in cases, there does not appear to be any supply of salvage by the insurance company and as such, there does not appear to be any liability under GST on the part of the insurance company in respect of this salvage value.

However, in situations where the insurance contract provides for settlement of claims on full IDV, without deduction of the 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.

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.

Circular No.-215/9/2024-GST

Date: 26/06/2024

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