FEBRUARY 26, 2019

By Saurabh Malpani

THE general insurance sector, which once had a single registration pan-India, is now registered in each state from where it does business.

A chunk of input credit suffered on claim expenditure was not available to these companies in the service tax regime due to restriction of cross-utilization of credits between State VAT and service tax laws. Today, GST has proved to be a game changer for them, on account of the subsuming of different taxes under one Act, albeit with some issues.

The first issue is the implication of anti-profiteering provisions on motor insurance business written by general insurance companies.

Under a typical motor insurance policy, in case of an accident, the insured get his vehicle repaired, at the expense of the insurance company. The general insurance company bears its agreed portion of the expense, which may include replacement of parts of vehicle and related service charges. Under the pre-GST regime, the garage used to charge state VAT on the portion of value attributed towards replacement of parts as sale of goods and service tax on the portion of value attributed towards provision of services. As the insurance company was a service provider, they were not eligible to avail the input tax credit (ITC) of the state VAT charged by the garage. It was a cost to the company. They were eligible to claim ITC benefit only to the extent of service tax charged by the garages on the provision of services.

With the advent of GST, garage is charging GST on the whole value of invoice, which is available as ITC to the insurance company. In other words, under the GST regime, the tax charged by the garages on the value of parts replaced is no longer a cost to the insurance company.

In this regard, one would have to be mindful of the applicability of the anti-profiteering provisions under GST which require that, in case of any benefit of input tax credit being availed, the same shall have to be passed on to the ultimate customer by way of commensurate reduction in prices.

The sector may be required to pass on the above benefits of input tax credits to its customers by way of commensurate reduction in prices of motor insurance policies.

However, there are multiple other factors which may require consideration and analysis such as -

- Increase in costs like GST implementation costs, compliance costs, etc.

- Loss-making status of the company

- Whether not availing such credits is an option to escape the hassle of revising prices?

The second issue which affects the sector is the cross-charging of inter-company services provided by centralized administration offices to branches located in different states. Often, the claims and support services of such companies are centralized at one location. However, they cater to customers booking insurance policies from branches located in other states. The GST law calls for taxation of such services provided by the central office to its other branches, even though the said services are provided free of cost. Further, the matter becomes worse if the other state is not eligible for full input tax credit on such service cost which is cross-charged (due to booking of insurance policies which are exempt from GST). The pain point is the challenge in valuing such services with employee salary forming the largest share of such cost. The Appellate AAR in Karnataka in the case of M/s Columbia Asia Hospitals Pvt. Ltd. - 2018-TIOL-31-AAAR-GST has also ruled that the service cost of the employees would be includible in cross charging between distinct persons.

Now let us come to the third issue. There are many cases in motor business where policy is issued from one state while claim is settled in another state. For example, policy is issued from Maharashtra while the car meets an accident in Gujarat. Normally, a garage in Gujarat would repair the said vehicle. In such a case, for the portion of parts in the tax invoice, the garages have taken a stand to charge CGST and SGST of Gujarat, treating the same as intra-state supply of goods (since the goods are delivered to the customer right at the garage). This creates a problem in availment of input credit on the said expense by the insurance company. The Maharashtra registration of the insurance company would not be able to avail ITC of CGST/SGST paid on the tax invoice of garage located in Gujarat. Even if the company provides the GSTIN of its Gujarat branch to the garage, it needs to be analysed whether the input credit can be availed by that state, since original policy was issued from another state. Even if the Gujarat GSTIN avails the ITC, then the option of cross-charge of such expense (and in what manner) by the Gujarat registration to Maharashtra registration also needs to be analysed.

The fourth issue deals with the taxability of re-possessed insured cars (after theft) sold by the company after release of the claim amount to the insured. Whether the company is only acting as a facilitator between the buyer of the car and the insured? If not, whether the company could be said to be a dealer in second hand goods, so as to avail the benefit of margin scheme in terms of Rule 32 of the CGST Rules? If the answer to the same is affirmative, what would be considered as the purchase value of the said re-possessed car? A similar problem also exists in the case of salvage deducted by the garage from the amount payable by the insurance company. Whether the same would amount to sale of salvage by the insurance company to the garage?

A suitable clarification on the above from CBIC would be welcome.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal)