In a recent development, SBI Life received a tax notice from the Bihar government. The reason was 'Non-reversal of the Input Credit availed & utilised under Rule 42 of Bharat Goods and Services Tax (BGST) and (Central Goods and Services Act (CGST) on the investment / saving portion of the premium received by the company from the policyholder.' We explore what this means.
Failing to reverse Input Credit (ITC) claimed and utilised under the above rule, specifically concerning the investment or savings component of premiums received by an insurance company from policyholders, represents an infringement of Indian tax legislation.
In this case, the total amount that is owed is Rs 36,10,97,250, which represents the combined financial obligation resulting from the tax assessment, interest on the outstanding tax, and the penalty for any infringements or delays in fulfilling GST obligations. It consists of a tax amount of Rs 19,56,20,408, interest of Rs 14,59,14,809, and a penalty of Rs 1,95,62,042.
Let us now understand why this action constitutes a violation.
Within the framework of the Indian Goods and Services Tax (GST) regime, ITC plays a pivotal role. It enables businesses to receive credit for the GST paid on inputs, allowing them to offset this credit against their GST liability on output supplies. This system ensures that taxation occurs solely on the value added at each stage of the supply chain.
Rule 42 of the BGST and CGST Act deals with reversing the Input Tax Credit (ITC) when someone uses goods or services for taxable and non-taxable purposes. If a registered entity claims ITC on such goods or services and then uses them for non-business purposes or for making GST-exempt supplies, they must return a portion of the ITC they claimed.
In the context of insurance companies, premiums received from policyholders encompass two distinct components: one related to risk coverage (taxable) and another associated with investment or savings (non-taxable or exempt). Insurance companies typically avail themselves of ITC on various inputs and services necessary for their operations, including those linked to the investment or savings component.
A violation occurs when an insurance company neglects to reverse the ITC previously claimed on inputs or services used for the premiums' non-taxable investment or savings segment. Given that this portion of the premium is not subject to GST, any ITC previously claimed against it is considered invalid and should be reversed in accordance with Rule 42.