Why salvage tax now moves the claim quantum needle
Salvage was long treated as a rounding entry on the claim sheet. A surveyor assigned a figure, the insurer either deducted it from the settlement or sold the wreck later, and nobody costed the tax. That casual treatment stopped working in late 2024. On 10 October 2024 the CBIC brought metal scrap under a reverse charge mechanism through Notification No. 06/2024-Central Tax (Rate), shifting the GST liability on scrap bought from unregistered sellers onto the registered buyer. Less than a year later, GST 2.0 took effect on 22 September 2025, collapsing the old multi-slab structure into two working rates of 5 percent and 18 percent, with most metal, plastic and rubber scrap sitting at 18 percent.
For a broker, these two moves changed the arithmetic of recovery, not just the paperwork. Salvage on a burnt-out plant, a water-damaged godown or a wrecked cargo consignment is rarely worthless. It is steel, copper, machinery castings, damaged stock and hull plate that will be sold as scrap. Whoever is treated as the seller of that scrap now carries a defined GST position, and whoever bought input tax credit on the original asset faces a reversal question the moment the asset is written off.
The quantum lever sits in an easy-to-miss place. Two claims with identical gross loss and identical salvage value can settle at materially different net figures purely because one insured retained the salvage and the other let the insurer dispose of it. Surveyors seldom model this, because tax is outside their brief and the loss adjuster's report stops at indemnity. This post walks the tax-meets-claims mechanics so that brokers, risk managers and CFOs can see where recovery leaks and how the salvage clause and the settlement structure decide the answer.
Retention versus deduction: the fork that decides who is the taxpayer
Every property or marine settlement takes one of two salvage routes, and the GST consequence follows the route rather than the loss.
In the deduction route, the surveyor assesses salvage value, the insurer nets that figure off the claim, and the insured keeps the damaged property. The insured now owns saleable scrap. When the insured, a registered business, later sells that scrap to a dealer, the insured is the supplier and accounts for output GST at the applicable rate, generally 18 percent on metal. The claim payout itself is not a supply and carries no GST, but the downstream scrap sale does.
In the retention route, the insurer pays the full assessed loss and takes over the salvage under the salvage and subrogation condition of the policy. Ownership passes to the insurer, who then disposes of the wreck. Here the insurer is the supplier for GST on the eventual scrap sale, and the insured is out of the tax chain entirely.
The practical friction is that many Indian fire policy settlements default to deduction because it is administratively simpler for the insurer, who avoids taking custody of damaged goods. That convenience can silently transfer a tax and disposal burden onto an insured who has neither the appetite nor the registration comfort to sell scrap. A broker who understands indemnity as a net-of-tax concept will negotiate the route deliberately rather than accept the insurer's default. The choice is a material damage settlement decision with a tax tail, and it belongs in the claim strategy, not in an afterthought email.
Reverse charge on metal scrap: how the taxpayer flips under Notification 06/2024
The October 2024 reverse charge rule rewired who remits the tax on scrap, and it reaches directly into insurance salvage sales. Notification No. 06/2024-Central Tax (Rate), effective 10 October 2024, covers metal scrap falling under Chapters 72 to 81 of the Customs Tariff Act, 1975, which sweeps in iron, steel, copper, aluminium, lead, zinc and most industrial metal waste that a fire or breakdown loss throws off.
The rule bites when a registered recipient buys metal scrap from an unregistered supplier. In that case the buyer, not the seller, pays the GST directly to the government under reverse charge and then claims the credit back. Where both parties are registered, the ordinary forward charge continues and the seller invoices GST.
This matters for salvage because the seller of the scrap is often the insured or an insurer, and the buyer is a scrap dealer. If an unregistered insured (say a small MSME manufacturer below the threshold) sells salvaged steel to a registered dealer, the dealer accounts for GST under reverse charge. If the insurer disposes of the salvage and the buyer is unregistered, the position reverts to forward charge on the insurer. A separate 2 percent TDS under GST applies on business-to-business metal scrap supplies above the prescribed value, adding a withholding step that affects cash timing on the salvage realisation.
For a broker building the recovery case, the takeaway is to identify the registration status of every party in the salvage sale before the deal closes. The wrong assumption about who is the taxpayer under subrogation can convert a clean recovery into a tax dispute that erodes the claim value.
Input tax credit reversal: the quiet leak under Section 17(5)(h)
The sharpest tax hit on a commercial loss is rarely the scrap GST. It is the reversal of input tax credit already taken on the destroyed asset, and it lands on the insured, not the insurer.
Section 17(5)(h) of the CGST Act, 2017 blocks input tax credit on goods that are lost, stolen, destroyed or written off. When a fire consumes finished stock or raw material on which the insured earlier claimed credit, that credit must be reversed and repaid to the government. The insurance claim indemnifies the value of the goods, but it does not automatically restore the reversed credit. Unless the policy sum insured and settlement basis account for this, the insured absorbs the GST reversal as an uninsured leakage.
Consider damaged stock with a cost of ten lakh rupees on which one lakh eighty thousand rupees of credit was claimed at 18 percent. If the goods are written off, that credit reverses. If the insured then salvages and sells the damaged stock as scrap, output GST arises on the scrap value. The net position depends on whether the salvage sale credit and the reversal offset each other, which they usually do not because the reversal is on full input value while the scrap sale is on a depressed realisation.
Brokers arranging business interruption and stock cover should confirm whether the reinstatement value basis and the deductible are framed inclusive or exclusive of recoverable GST. This is where a careful reading of the policy wording and the settlement basis protects real cash, and where a generic claim note misses six figures on a mid-size loss.
Net recovery arithmetic on a property loss, worked line by line
The theory only lands when the numbers are on the table. Take a manufacturing fire with an admitted material damage loss and salvageable steel plant and machinery.
Assume gross admitted loss of one crore rupees, assessed salvage of twelve lakh rupees on the damaged machinery, and a policy average clause that does not bite because the sum insured is adequate.
Under the deduction route, the insurer pays one crore minus twelve lakh, so eighty-eight lakh. The insured keeps the wreck and sells it as scrap for the twelve lakh assessed value. On that sale the insured accounts for output GST at 18 percent, roughly two lakh sixteen thousand rupees, collected from the buyer but requiring compliance, invoicing and, if the buyer is registered under reverse charge, a shifted deposit. The insured's cash from salvage is the twelve lakh scrap price; the GST is a pass-through only if the buyer bears it cleanly.
Under the retention route, the insurer pays the full one crore, takes the machinery, and handles the scrap sale and its GST itself. The insured's recovery is a clean one crore with no scrap disposal obligation and no exposure to a mis-stated tax position.
The headline settlement difference is twelve lakh, but the real economic gap is narrower once you account for the scrap cash the insured realises under deduction. The decisive variables are the insured's registration status, its ability to actually sell the scrap at the assessed value, and any input credit reversal on the destroyed asset. On slow-moving or specialised machinery, real scrap realisation often falls below the surveyor's figure, so deduction leaves the insured chasing a discount that the settlement already banked.
The lesson for the broker is to model net-of-tax recovery on both routes before agreeing the loss adjuster recommendation, not after the cheque clears.
Marine salvage and cargo write-offs: abandonment, title and GST on damaged goods
Marine losses add a title question that property claims do not. When a cargo owner declares a constructive total loss and abandons the goods, the Marine Insurance Act, 1963 transfers the insured's interest in the subject matter to the insurer on acceptance of abandonment. The insurer becomes the owner of the salvaged cargo and steps into any sale of it.
That transfer decides the GST seller. If the insurer accepts abandonment and later sells damaged consignment, whether water-stained textiles, dented drums of chemicals or corroded steel coil, the insurer is the supplier and accounts for GST on that salvage sale. If the insurer instead settles on a partial loss and leaves the cargo with the marine cargo owner, the owner sells the damaged goods and carries the output tax.
The rate follows the goods, not the loss. Salvaged metal cargo sits at 18 percent under the September 2025 structure and can fall under the metal-scrap reverse charge if sold as scrap to a registered buyer. Damaged but still usable goods sold at a discount attract GST at their normal rate on the discounted price, which is a different position from selling them as scrap.
For general average and hull matters the chain lengthens further, because salvage sale proceeds interact with the average adjustment. Brokers handling marine-insurance recoveries should confirm, in writing, whether the insurer accepts abandonment before assuming who owns and therefore who taxes the salvage.
Building the tax position into the wording, not the afterthought
The recurring failure is that salvage tax is decided by default rather than by design. The insurer picks the administratively easy route, the surveyor assesses a pre-tax salvage figure, and the insured discovers the GST and credit-reversal consequences only when the accountant closes the books. By then the settlement is fixed.
The fix is upstream. Brokers should press three points before a loss occurs and again at first notification. First, whether the salvage and subrogation clause defaults to insurer retention or insured deduction, and whether that default can be varied by endorsement. Second, whether the sum insured and settlement basis are framed net or gross of recoverable GST, so that a Section 17(5)(h) credit reversal does not become an uninsured cost. Third, the registration status of the likely scrap buyers, because that determines whether the October 2024 reverse charge shifts the deposit obligation.
These are wording questions as much as tax questions, and they differ from one insurer's policy schedule to the next. A fire or marine wording that is silent on salvage tax treatment leaves the parties to argue after the loss, when bargaining power has evaporated.
This is exactly the comparison work that gets skipped under claim pressure. Sarvada's searchable insurer policy-wordings intelligence lets a broker read across salvage clauses, subrogation conditions and settlement-basis language from multiple insurers side by side, so the tax exposure is visible before the slip is bound rather than after the cheque is cut. If you want to see how a given wording handles salvage retention, GST and credit reversal against the market, Request Access and search the clauses directly.