Applicability of vat on insurance claim

[Asked by Guest]

whether Vat is payable on Insurance Claim received for stock damaged and burnt in fire

VAT is payable only in respect of consideration received on transfer of property in goods viz. 'sale' as defined under the VAT Act. Settlement of insurance claim by the insurance company cannot said to be transfer of ownership and thus no VAT is payable. However any input tax credit availed in respect of the stock damaged should be reversed.

[Madhukar N Hiregange]

In my view the input tax credit may not always be reversible. The loss is a business loss and was after the same was purchased and whether the same can be said to be used for any other prupose is to be determined. Under central excise it would not be reversible in case the input has entered the manufacturing stream.

In number of State VAT Acts, there is a specific provision to the effect taht no input tax credit is available on goods which are not sold because of any loss or destriction, for any reason including natural clamity. If ITC has already been availed, the same should be reversed.

AI Summary

VAT on insurance claims: insurance settlements are not taxable sales, but input tax credit may require reversal.
VAT is chargeable only where consideration is received for transfer of property in goods; an insurance settlement for lost or destroyed stock is not a transfer of ownership and thus not subject to VAT. However, input tax credit claimed on the damaged stock is commonly disallowed under many State VAT provisions for goods not sold due to loss or destruction, and any ITC already availed should be reversed or adjusted, although practitioners debate limited exceptions where inputs entered a manufacturing stream.