The end consumer always takes the entire burden of indirect taxes in a tax structure. Goods and Services Tax (GST) in which as many as 17 different central and state taxes and 23 different cesses got subsumed with effect from 01.07.2017 is also a form of value added tax and the major form of indirect taxes in our country today apart from Basic Customs Duty which prevails only on import of goods. Seamless movement of Input Tax Credit (ITC) is possible in the GST regime on supply of goods and services and a taxable person registered under GST law is eligible for ITC unless it is restricted for him to avail otherwise.
As per Rule 56 (2) of the Central GST Rules, 2017, every registered person has to maintain the accounts of stock in respect of goods received and supplied by him, and such accounts shall contain particulars of the opening balance, receipt, supply, goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample and the balance of stock including raw materials, finished goods, scrap and wastage. However, this provision is not applicable to a taxable person who is either a trader or a manufacturer and has opted for Composition scheme.
A Fire Insurance Policy can cover input goods which may be in form of stocks (raw material, work-in-progress, finished goods, consumables, stores and spares etc.) and capital goods in form of plant and machinery, furniture and fixture, computer, electrical installation etc. Whenever there is an inward supply of either input or capital goods, a taxable person is eligible for ITC which in fact reduces his tax cost. He avail such eligible ITC and utilize the same against off-setting his GST liability which may be in form of Integrated GST (IGST), Central GST (CGST) of State GST (SGST). Of course, ITC available in form of CGST and SGST are not allowed to be utilized against each other for discharging tax liability. However, ITC can be availed by the taxable person by filing GSTR 3B and upon fulfilment of certain conditions which are as under:
- There must be a valid and GST compliant Tax Invoice available with the taxable person;
- The goods must have been supplied to the taxable person;
- The Supplier must have filed GST Return 1;
- The Supplier must have paid the GST either by utilizing his ITC or by cash;
- The Supplier must have been paid within 180 days from the date of Invoice by the taxable person;
However, as per the provision of Sec. 17 (5) (h) of the Central GST Act, 2017, ITC will not be available to a taxable person in the following cases –
- If the goods are lost; or
- the goods are destroyed; or
- the goods are stolen;
- the goods are written off;
Here goods means either the input goods or capital goods and those goods which are taxable and the taxable person i.e. the Insured is eligible to avail ITC or has availed ITC.
In case of loss due to a covered peril under a Fire Policy, an Insured claims at Invoice price which includes GST as applicable. The Insured in normal case avail such ITC by filing his GST Return 3B which is allowed as per GST law. However, if there is loss or damage or destruction or theft/burglary of the insured item in form of Stock, the Insured is required to reverse the ITC already availed on the same as ITC is not available to him in such cases. As there is no scope for further supply or value addition, the GST is to be borne by the taxable person himself who suffers loss/damage/destruction/theft.
An Insured who is unaware of this provision is quite expected to claim the tax cost in form of GST as per the Invoice for Inward supply made to him by a Supplier. However, if he has availed ITC on the same, then he should not be again indemnified for the same as it will amount to gain in his hand. Amount of GST may be excluded while arriving at the gross loss amount. Item wise analysis may be required when the goods are charged at different GST rates.
However, if the Insured is aware of the provision and reversed the ITC for the lost/damaged/stolen goods, then the same may be considered while assessing the loss by the Underwriter only after going through the documentary evidence in form of GSTR 3B in which the Insured has made reversal of ITC. In case, items wise ITC is not possible to be arrived at, then the ratio of tax liability to taxable turnover may be the basis to deduct the ITC availed by the Insured.
It is also prudent to take a declaration from the Insured that he has reversed the ITC for such damaged/lost/stolen goods and shall not avail it again.
Illustration
Jhilmil Saree House is engaged in whole selling of sarees and have their godown located at Bhubaneswar, Odisha. They are in this business since last 10 years and maintain a stock of around Rs.10.00 lakhs in their godown which is taken on rent and located at ground floor of a three-storied building. They have taken a fire insurance policy covering their stock maintained at Godown for a sum insured of Rs.10.00 lakhs. There was a heavy rain in the month of July, 2018 and the entire area where godown of the Insured was located was inundated upto 4’ height. Stock worth Rs.5.00 lakhs (as per Invoice price and said to be at cost by the Insured) got water absorbed and the Insured lodged a claim for the same as inundation is a covered peril under a fire policy. However, it was found that the Insured had a stock of Rs.12.00 lakhs before the peril which is considered to be stock at risk. The Insured is registered under GST law and filed his GSTR 3B and GSTR 1 all along. Sarees are subject to 5% GST and the Insured availed ITC on all it’s purchases made so far. The Insured does not maintain any Stock Register as such, but maintain all Purchase Invoice as it is a condition to avail ITC. It is very difficult to identify the running and non-moving/slow-moving/obsolete stock in absence of any stock register and it is quite apparent that some of those non-moving/slow-moving/obsolete stock at the lower level of the racks and/or floor, which got damaged due to water contamination.
The Insured agreed to retain the damaged stock and offered salvage @ 25% which is acceptable and can be considered for assessing the loss. Policy excess under a fire policy is 5% of claim amount subject to a minimum of Rs.10,000/-.
The Insured submitted the GST Returns of subsequent months and it was found that, he had not reversed any ITC for the damaged stock due to inundation.
In this backdrop assess the net loss amount which is payable to him.
Assessment of Loss
After considering the ITC which the Insured has already availed and other policy conditions, loss can be assessed as under:
Conclusion
It is of course advisable to an Insured to reverse the ITC in case there is any loss/ destruction/ damage/ theft of stock as he can get the benefit of the same from the Insured. Tax Department or GST Auditor if come across the same at a subsequent stage, then there will be a liability/demand along with interest and penalty which will be a very costly affairs for an insured as a taxable person. Of course, understanding of this provision and consequence thereof is required along with filing the GSTR 3B and submission of the same before the Underwriter before assessment of such loss.
