Within the complex Indian law, “actionable claims” hold significant weight, particularly in domains such as taxes and business transactions. In the realm of Goods and Services Tax or GST registration, an actionable claim holds a distinct definition and treatment, which differs from conventional goods and services. In this blog, we shall see actionable claims concerning the Goods and Services Tax and the Transfer of Property Act.
Understanding Actionable Claim under GST
An actionable claim under GST refers to a claim related to any debt, whether it is secured or unsecured, and excludes items like lottery, betting, and gambling. GST regulations have specific provisions for the treatment of actionable claims, leading to significant consequences for businesses.
Examples of Actionable claim
Some examples of actionable claim are:
1. Outstanding Invoices: In this scenario, a business provides goods or services to a customer but has not yet received payment. These unpaid invoices represent actionable claim for the supplier and are subject to GST.
2. Bank Loans: When a bank extends a loan to a borrower, it creates an actionable claim in the form of a debt. Furthermore, the interest charged on this debt is also subject to GST.
3. Life Insurance Policies: Within the realm of insurance, a life insurance policy is considered an actionable claim. It assures the beneficiary of a sum of money upon the policyholder’s death or other specified conditions.
4. Promissory Notes: Promissory notes, as defined by the Transfer of Property Act, fall under the category of actionable claim. They serve as legally binding assurances to pay a specific sum of money.
Understanding the concept of actionable claim and their treatment under GST is essential for businesses to comply with taxation regulations and make informed financial decisions.
Exploring Types of Actionable Claims
In the domain of legal rights involving the demand for something, actionable claim can be categorised into two primary types, each with distinct characteristics and legal implications. These categories are Secured Actionable claim and Unsecured Actionable claim.
1. Secured Actionable Claims
Secured Actionable claim is characterised by the presence of security or collateral backing the claim. This provides a high level of security to the creditor. Several common instances of Secured Actionable claim include:
Mortgages mean when someone needs to borrow money to buy a home. The bank, often the lender, has a legal right to the property. If the borrower doesn’t pay the money back, the bank can sell the house to get its money.
Auto loans are like mortgages but only for vehicles. The lender can take the vehicle if the borrower can’t pay what they owe, using the car’s value to cover the debt.
In the business world, secured business loans use business assets as security. If the business can’t pay back the loan, the lender can take or sell these assets to get the money back.
2. Unsecured Actionable claim
In contrast to Secured Actionable claim, Unsecured Actionable claim lack any specific collateral attached to them. These claims rely solely on the debtor’s commitment to repay the creditor. While offering less security to the creditor compared to secured claims, unsecured claims are common in various financial transactions and contractual agreements.
A few examples of Unsecured Actionable claim include:
Credit Card Debt: Credit card debt serves as a prime example of an unsecured actionable claim without collateral. Credit card companies extend credit based on the cardholder’s creditworthiness.
Personal Loans: Much like credit card debts, personal loans are unsecured, lacking any collateral. Lenders grant these loans based on the borrower’s repayment history and financial stability, with no specific assets tied to the claim.
Trade Credit: In the realm of business, suppliers often offer trade credit to their customers. This practice constitutes an unsecured actionable claim, as suppliers provide goods or services with the expectation of receiving payment at a later date.
Methods of Transferring Actionable claim
The transfer of actionable claim can occur through two distinct methods:
1. Transfer by Assignment:
In this method, the original claimant relinquishes their rights in the actionable claim to a third party, who subsequently becomes the new claimant. This transfer of rights typically occurs through a formal assignment, and the new claimant assumes the position of the previous claimant.
2. Transfer by Negotiation:
This method involves the negotiation of a negotiable instrument, such as a promissory note. In a negotiation scenario, the claim is transferred to a new holder through the process of endorsement. The act of endorsement effectively passes the ownership of the actionable claim from one party to another, allowing the new holder to exercise the rights associated with it.
Scope of GST and Treatment of Transfer of Actionable claim
Under the CGST Act, actionable claims are categorised as “goods” with specific rules governing their taxation. They are subject to GST only when they are transferred, sold, or given away in exchange for a price. This distinction is crucial because actionable claims do not fall under the definition of goods or services, as outlined in Schedule III of the CGST Act. GST is applicable exclusively when an actionable claim is supplied, and the tax liability arises when these claims are assigned, sold, or disposed of in consideration of a price. In essence, the taxation is triggered when the transfer of actionable claim resembles a supply, rather than on the underlying debt itself.
Actionable Claim Interpretation under Other Laws: The Transfer of Property Act
In addition to the GST framework, actionable claim also bear significance under the Transfer of Property Act. In the context of the TPA, an actionable claim pertains to a claim associated with a debt or beneficial interest in movable property that can be enforced through legal action.
The TPA defines actionable claim in Section 3, where it specifies that an actionable claim comprises:
A claim to a debt that lacks security through any of the following means:
- Mortgage of immovable property
- Pledge of movable property
- Mortgaging of movable or immovable property
A beneficial interest in movable property not in the possession of the claimant, whether actual or constructive.
Comparing Transfer of Actionable Claims under GST and TPA
The transfer of actionable claims under GST and TPA adheres to distinct legal and tax procedures. GST primarily governs the tax aspects of such transfers, while the TPA offers the legal framework for actionable claim transfers. It is essential to comprehend the intricacies of both systems when dealing with actionable claims in various transactions, as the treatment and implications may differ significantly.
Final Thoughts
The concept of actionable claims holds a vital place in the legal and taxation sector, with significant implications under both the GST framework and the Transfer of Property Act. These claims, recognised as “goods” under GST, are subject to taxation only when transferred or assigned for a consideration. The tax applies to the right to recover a debt, not the debt itself, as they do not fit within the conventional definition of goods or services. In contrast, the Transfer of Property Act provides the legal framework for the transfer of actionable claims, outlining the conditions under which they can be enforced through legal action. Understanding these regulations is essential for individuals and businesses when dealing with actionable claims in various transactions.
