Tax Treatment of Profits


Let us understand a very important  Add on cover which is commonly demanded by market in large risk Mega policies. 

This extension simply demands insurance company to pay for additional tax liability following a material damage and /or Business Interruption loss under their policy.
This is to be understood by all that all MD claims received for  by insured for replacement of damaged property or for repairs, are not  taxable as per prevailing Income Tax norms. However, any BI loss which is received to compensate their lost income during the interruption period has to be added as taxable income and insured is liable to pay tax on this amount. 
Insured may demand reimbursement of such tax liability but insurance companies are not supposed to agree to any such demands because in normal course insured would have paid these taxes even if no interruption would have taken place during the financial year.

Sometimes, it is also observed that insured demands add on cover to  seek reimbursement of additional tax liability if the business interruption loss takes place in a manufacturing unit situated in SEZ zone and in order to maintain continued supply to market, insured gets the goods manufactured in a unit which is located outside the SEZ zone where there is no tax exemption.
Even under these circumstances no payment is  supposed to be made  because  the manufacturer of goods is going to add all expenses including his profit margin and this cost is  paid as "Increase Cost of Working" while computing BI loss and the turnover so generated is reduced from total turnover lost during the interruption period thereby reducing the loss of gross profit claim.


Comments

  1. Vinod ChaudhryAugust 12, 2020 at 11:29 PM

    In theory since GP is being insured (& indemnified) the profits therefore in the hands of the insured are taxable.

    ReplyDelete
    Replies
    1. V.P SharmaAugust 14, 2020 at 7:33 AM

      It is true that loss of gross profit claims paid are taxable but insurers cannot make reimbursement of the same because insured would have paid otherwise also had the loss not taken place.

      Delete
  2. UnknownAugust 16, 2020 at 12:34 PM

    Sir under IAR policy material damage MBD section for finding out VAR whether GST portion is to be taken into account particularly when we don't paybGST on repair reinstatement since client is eligible for input credit. Your observations / opinion sir

    ReplyDelete
    Replies
    1. V.P SharmaAugust 17, 2020 at 7:26 PM

      Even if GST is not paid under repairs, the replacement value shall be considered including the GST which is payable on replacement of machinery For the purpose of application of under insurance.

      Delete

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