GST Issues: ITC of prepaid Insurance premium

Doubts have been raised on the availment of ITC on prepaid insurance because in conditions provided for claiming ITC (section 16(2)) under GST act, one of the conditions for availing ITC is the receipt of goods and services. So there are apprehensions that insurance service is not received to the extent of prepaid insurance hence ITC is not available. However there is nothing in GST act which disallows the ITC of GST paid on full insurance premium regardless of the periodicity of the premium paid.

1. No financial year and Prepaid expenses concept in GST Act: First of all, the figure of prepaid insurance is calculated as per matching concept which is one of the accounting conventions whereby firms recognize revenues and their related expenses (relative to revenues not independently) in the same accounting period i.e. financial year. Income tax act also recognizes the financial year concept. But there is no such financial year concept in GST. In GST, there is no concept of prepaid expenses and carry forward of ITC in the next accounting period based on periodical benefits. The condition of receipt of goods/services as per clause (b) of section 16(2) provides:

b) he has received the goods or services or both.

As one can see, above clause does not say “receipt of goods and services in the given accounting year” i.e. the receipt of goods and services is not further associated with accounting period nor any such restriction/condition related to accounting period is provided in this section (section 16). The clause (b) only provides for the receipt of service in substance. Hence under GST, Insurance service for the entire underlying policy period is supplied and received when insurance policy (invoice) is issued by the Insurance Company. Insurance service is duly received for the purpose of section 16(2) when invoice or policy document is issued but prepaid insurance is calculated not because the service to that extent is not received but as under accounting/income tax revenue is accounted for in the books only of a particular period (fin Year) so accordingly expenditure is also required to be accounted for that particular period only. So periodical accounting does not define the “receipt” of services. Service for the purpose of GST is received instantly on receipt of invoice.

Further, benefits of capital assets are also enjoyed in more than one accounting period but there is no such restriction in GST act to avail the ITC of capital assets periodically. Full ITC is available in GST against capital assets. However, in service tax regime the same was available in two yearly installments and this restriction was duly provided in the service tax act. But as we can see, no such periodical restriction is provided in the GST act. Similarly, in accounting/income tax advance receipt is not recognized as income under matching concept but GST is payable on the same (so there is no matching concept for revenues and accordingly no matching concept for expenses) hence GST act is more like a cash flow phenomenon.

2. Explanation to Section 13(2) of CGST Act: Further, Explanation to Section 13(2) (Time of supply of services) of CGST Act provides:

the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment;

So as per the above if supply is deemed to be provided to the extent it is covered by invoice then the same can also be deemed to have been received for the purpose of section 16(2). Further, section 16(2) starts with non-obstante clause “Notwithstanding anything contained in this section” so some have opined that this non-obstante clause restricts the application of any other contradictory clause in any other section on the conditions specified in this section for availment of ITC. But non-obstante clause in this section only protects the actions provided under this clause from any other over-lapping clause provided only under this “section” (section16) not under the entire act. So explanation to Section 13(2) of CGST Act also covers the section 16(2) and service can be deemed to have been received to the extent covered by the invoice.

Hence, as per the above it can be concluded that the ITC of GST paid on insurance premium (regardless of periodicity) can be availed provided the invoice has been issued and payment has been made.

(Views are personal)