Actionable Claim Under GST - All You Need to Know

What is Actionable Claim Under GST?

According to Section 1(2) of the CGST Act 2017, an "actionable claim" carries the same definition as outlined in Section 3 of the Transfer of Property Act, 1882. As per this, an actionable claim refers to any claim for a debt other than one secured by a mortgage, hypothecation, or pledge or a claim to a beneficial stake in movable property not in the claimant's possession, whether actual or constructive. It’s a legal claim recognized by civil courts as grounds for relief, whether the debt or interest is existing, accruing, conditional, or contingent.

Types of Actionable Claims

An actionable claim is essentially a legal right to demand something, often financial compensation, from another party. These claims fall into two main categories: Secured Actionable Claims and Unsecured Actionable Claims, each with its own legal standing and implications.

1. Secured Actionable Claims

Secured actionable claims are backed by collateral or assets. If the debtor fails to pay their debts, the creditor has the right to seize or liquidate the attached assets, offering higher security to the creditor.

Common examples of secured actionable claims include:

• Mortgages: When you mortgage property, the lender (usually a bank) holds a secured actionable claim. If you default, the lender can sell the property to recover the debt.
• Auto Loans: Similar to mortgages but specific to vehicles. If you fail to pay, the lender can repossess the car to cover the debt.
• Secured Business Loans: Businesses often secure loans with assets. If repayment fails, the lender can seize or sell those assets to recoup the loss.

2. Unsecured Actionable Claims

Unlike secured claims, unsecured actionable claims do not involve collateral. These are based solely on the debtor’s promise to repay, making them less secure for creditors, but they are still common in financial transactions.

Examples of unsecured actionable claims include:

• Credit Card Debt: A classic example of an unsecured claim. Credit card companies offer credit based on your creditworthiness, but if you fail to pay, there’s no collateral to seize—only your credit score suffers.
• Personal Loans: Like credit card debt, personal loans don’t require collateral. Lenders base approvals on financial stability and repayment history.
• Trade Credit: In business, suppliers often extend goods or services on credit. This is an unsecured actionable claim, relying on the customer’s promise to pay later.

Modes to Transfer Actionable Claims

Actionable claims can be transferred through two primary methods:

• Assignment
  In this process, the original claimant transfers their rights over the actionable claim to another party, making the new party the rightful claimant.
• Negotiation
  This involves the transfer of a negotiable instrument, such as a promissory note, to a new holder. The transfer is completed through the endorsement, allowing the new holder to claim the right associated with the instrument.

Example of Actionable Claim

An actionable claim is a licit right that can be enforced in a court of law. Here are some common examples:

• Outstanding Invoices: Imagine a business that has supplied goods or provided services to a consumer but hasn’t received payment yet. The unpaid invoice stands as an actionable claim for the supplier and falls under the scope of GST.
• Bank Loans: When a bank grants a loan to a borrower, it makes an actionable claim in the form of debt. The interest levied on this debt is also subject to GST.
• Life Insurance Policies: In the world of insurance, a life insurance policy is considered an actionable claim. It guarantees a payout to the beneficiary upon the policyholder's death or other specified events.
• General Insurance Policies: A general insurance policy is an agreement between the policyholder and the insurer. It provides coverage for valuable assets, like a vehicle, against risks such as fire, theft, or accidents in exchange for an insurance premium.
• Promissory Notes: A promissory note is treated as an actionable claim under the TPA (Transfer of Property Act), as it represents a legal promise to pay a certain sum of money to the holder.

GST on Actionable Claims

Under the CGST Act, actionable claims are classified as “goods” but have specific rules. They attract GST when they are transferred, sold, or assigned for a price. The tax is not levied on the debt itself; instead, it applies to the transfer of the right to recover the debt. This is because actionable claims are not considered a supply of goods or services under Schedule III of the CGST Act.

The GST liability arises only when the actionable claim is treated as a supply, such as being assigned, sold, or disposed of for consideration.