Input tax credit on insurance expenses under GST

Background

Under GST law, input tax credit can be availed by the registered person on the inward supplies of goods/services used/intend to be used in course of business of making taxable supplies/zero-rated supplies. ITC is eligible except on the specified list of blocked credit set out in section 17(5). ITC on insurance expenses is area where there is great deal of confusion on eligibility leading at times to situation of non-availment of credit even where it is not restricted under the law.

Some of the main insurance expenses are pertaining to general insurance such as fire, burglary, marine, stock, transit insurance to name a few. Then there is life insurance and health insurance expenses incurred by businesses.

In this article the paper writer has examined the major kinds of insurance expenses incurred by the taxpayer and the restrictions and eligibility to the credit thereof, relevant decisions in this context as well.

ITC and Insurance expenses

Section 17(5) sets out list of blocked credit and relevant aspects of eligibility to ITC on insurance are as under

ITC on insurance in respect of

• Motor vehicles for transport of persons[with approved seating capacity of 13 or less[including driver] is available as follows: When used for specified purposes - onward supply of vehicle/supply of transport of passengers/ training services on motor vehicle driving
• Allowed for manufacturer of Motor Vehicle + to supplier of general insurance services-of Motor vehicle insured by him
• For motor vehicle with approved seating capacity of more than 13 persons, no restrictions on availing vehicle related credit on insurance of such vehicle.
• For Goods transport vehicle-no restriction on Insurance ITC

Credit on life insurance and health insurance: It is blocked except in following cases

• ITC shall be available where used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply
• ITC shall also be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force

Eligibility to ITC on various insurance expenses in a nutshell

• Insurance expenses of fire, machinery, cash handlinginsurance: ITC is eligible on such expenses. In the decision of C.C.Ex.Raipur vs. Beekay Engg. & Castings Ltd (2009 (16) S.T.R. 709 (Tri. - Del.) held Cenvat credit of Service tax on Input service ofinsurance premium of general insurance for fire, machinery breakdown, cash handling is eligible for credit under Rule 2(l) of Cenvat Credit Rules, 2004.
• ITC on marine insurance: ITC is eligible. In Alstom T & D Ltd. Vs Commissioner, LTU, Chennai (2016 (41) S.T.R. 646 (Tri. – Chennai) held Marine Insurance Policy undisputedly, said insurance policy taken to protect property being an integral part of export, credit available.Rules 2(l) and 3 of Cenvat Credit Rules, 2004.
• Factory/Building insurance: ITC on building insurance is eligible.
• Credit on burglary insurance:It is eligible. Similarly held in JSW Steel (Salav) Ltd. Vs Commissioner Of Central Excise, Raigad (2016 (46) S.T.R. 863 (Tri. – Mumbai) where burglary insurance was held eligible.
• Plant and machinery/Laptop insurance: ITC is eligible. Similarly held in Hindustan Zinc Ltd. Vs C.C.Ex., Jaipur(2015 (37) S.T.R. 608 (Tri. – Del).
• Credit on cash in transit, goods in transit insurance: ITC is eligible on such expenses. In DSCL Sugar vs C.C.Ex., Lucknow (2014 (34) S.T.R. 58 (Tri. – Del) held that Cenvat credit eligible on Insurance of sugar in transit, insurance of cash/money in transit. Such cash disbursement is for procurement of raw material and has direct nexus with the manufacturing activity.
• In Hindustan Zinc Ltd. Vs C.C.Ex., Jaipur supra held goods in transit, cash in transit is an integral part of manufacturing business, as no manufacturer would carry on manufacturing operations without insurance of cash in transit, goods in transit, etc. against any loss due to accident, natural calamities, etc. In view of this, the services have to be treated as an activity related to the business and would be eligible for Cenvat credit.
• Product liability and product recall insurance: Such credit is eligible and can be availed. In CCL Products vs Commr of C.Tax. Guntur 2019 (369) E.L.T. 780 (Tri. – Hyd) held such credit eligible and the activity not opposed to manufacturing activity as said insurance policies address the financial risks of manufacturer. Rule 2(l) of Cenvat Credit Rules, 2004.

The above insurance expenses ITC can be availed to the extent used for business of making taxable supplies/zero-rated supplies of exports/supplies to SEZ unit/developer.

Common issues

Can credit be availed on health insurance?

Yes under GST law, such credit is eligible to extent it is a statutory requirement for employer to provide to employee under law.

Under erstwhile ST regime, it was held that such credit on such insurance can be availed when obligation of employer under law.

In the Group Insurance of all Employees against sickness or accident, the same has been held as Cenvatable by the judgment of Hon'ble Karnataka High Court in the case of Stanzen Toyotetsu India (P) Ltd. (2011 (23) S.T.R. 444 (Kar.). Insurance/Health policy - Assessee, under Workmen's Compensation Act to obtain insurance policy covering risk of employees. Employees' State Insurance Act casts obligation on employer to provide insurance services. Under these circumstances, this Group Insurance Health Policy though is also a welfare measure is an obligation which is cast under the Statute that the employer has to obey. Section 38 of the Employees' State Insurance Act, 1948, mandates that subject to the provisions of the Act, all employees in factories or establishments to which this Act applies shall be insured in the manner provided by this Act. Group Insurance Health Policy, though welfare measure, an obligation cast under Statute for employer to obey, contribution of employees notwithstanding. Credit available - Rule 2(l) of Cenvat Credit Rules, 2004.Similarly held in Commr. of C. Ex. & Service Tax, LTU, Bangalore vs Microlabs (2011 (270) E.L.T. 156 (Kar).

Whether credit on covid medical insurance is eligible?

Section 17(5)(b) of CGST Act restricts the ITC wrt medical insurance amongst others. However, ITC on such services shall be allowed where it is mandatory for an employer to provide the same to its employees under any law for time being in force.
As per Annexure II of MHA order dated 15.04.2020 issued under the Disaster Management Act, 2005 (DMA), all workplaces should provide: Medical insurance

Given that transportation facility and Medical insurance are made mandatory under DMA vide MHA order, businesses could avail the input tax credit on such expenses even though the ITC is not allowed under normal circumstances.

Having said that, Medical insurance has been omitted from MHA order dated 01.05.2020 and the said guidelines fails to save the earlier order dated 15.04.2020 and hence a question arises whether the ITC on medical insurance obtained only during the period 15.04.2020 to 01.05.2020 are eligible to be availed? In view of paper writer, ITC on such medical insurance should be eligible as there was the MHA order making medical insurance mandatory, as such services could be covered at the limb "obligatory for employer under the law".

Conclusion

It is suggested to examine the various nature of insurance and other expenses incurred and avail ITC wherever it is eligible under provisions of GST but missed to avail. The last date to avail credit on the invoices pertaining to supplies done in 2021-22 is the due date to furnish the GSTR 3B for September 2022 as per existing GST provisions. It is suggested to get a quick GST credit review done for the past year by competent professional to ensure completeness of credit availment on insurance and other eligible ITC as well.

The author can also be reached at roopa@hiregange.com