GST on Reimbursement of Expenses to a Supplier
A business is covered by various laws. Businesses may undertake certain complex transactions during their operations. The legal effects of such transactions need to be determined before giving them the desired effect. While the transactions may be conducted with bona fide intent, the outcomes can be adverse if it does not comply with the requisite provisions of the law.
One of the common situations businesses face is when a supplier incurs certain expenses on behalf of the recipient of the goods or services. While the supplier will receive its payment for the goods or services supplied, he will also receive the reimbursement of expenses incurred on the recipient’s behalf. A pertinent question arises whether GST on reimbursement of such expenses should be levied. Does GST need to be levied on this transaction as well? Let’s analyse the provisions!
What does the law state?
As per Section 15 of the Central Goods and Services Tax Act, 2017, the value of supply shall be the transaction value. The transaction value is the price actually paid or payable for the supply, provided the supplier and recipient are unrelated persons, and the price is the sole consideration for the supply.
As per Section 15(2)(c), the value of supply shall also include incidental expenses (like packing, commission, etc.) charged by the supplier from the recipient of supply as well as any other amount the supplier charges for anything done by him in relation to the supply of goods or services before or at the time of the delivery.
However, it comes with an exception! Rule 33 of the CGST Rules also provides that the expenses incurred by the supplier as a pure agent of the recipient shall not be included in the value of supply. Let’s understand what a Pure Agent is and the GST implication in such a case.
What is a pure agent under GST?
As per the explanation to Rule 33, ‘pure agent’ means a person who
Enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
Neither intends to hold nor holds any title to the goods or services or both so procured or supplied as a pure agent of the recipient of supply;
Does not use for his own interest such goods or services so procured; and
Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.
Thus, the above definition implies that a pure agent does not own any interest in the expenditure incurred on behalf of the recipient. The supplier will act as an agent by just claiming the reimbursement.
However, the supplier will be considered as a pure agent for such expenditure only if the following conditions are satisfied:
While making payment to the third party for the expenditure incurred on behalf of the recipient, the supplier acts as a pure agent for the recipient;
The payment made by the supplier as a pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the supplier to the recipient of supply;
The supplies that are procured by the supplier as a pure agent are in addition to the supplies he made to the recipient on his own account.
If all the three conditions given above are satisfied, the supplier shall be considered as the pure agent for the expenses incurred on the recipient’s behalf.
GST implication on Reimbursement of expenses
Such reimbursement shall not be included in the value of supply made by the supplier to the recipient, nor shall it be included in the turnover amount. Therefore, no GST shall be charged by the supplier from the recipient on the reimbursement component, subject to the fulfillment of the above conditions. As the reimbursement amount should be separately indicated, GST shall be charged only on the amount of supplies made by the supplier on his own account.
Suppose Karan contacts a professional for company incorporation. Karan asks the professional to pay for the government fees on his behalf, and he will reimburse the same to the professional. Now, when the professional issues the invoice to Karan, he separately indicates the government fees that he paid on Karan’s behalf.
Here, the professional is acting as a pure agent for the government fees component as it is an expenditure incurred by him on behalf of Karan. Therefore, the professional need not charge GST on the government fees component. Only the company incorporation services provided by the professional shall be liable to GST.
Another typical example is the reimbursement of transportation charges under GST. Transportation charges paid by the supplier on the recipient’s behalf shall not form part of the supplier’s turnover if the above conditions are fulfilled. Supplier is usually concerned with the goods supplied and is merely acting as a pure agent for the transportation facility. Thus, on reimbursement, GST should not be levied.
Taxation laws are in place to tax the transactions triggering chargeability, and they do not discourage genuine transactions undertaken during the course of the business. The purpose behind putting conditions in the taxation laws for such transactions is to check on tax evasion. Had these conditions not been there, then the taxpayers could have escaped their tax liability by just reclassifying the transactions as reimbursement of expenses instead of the actual supply of goods or services.
When the taxpayer proceeds with his income tax return filing, care should be taken that such reimbursement does not form part of the actual turnover of the supplier. Otherwise, this will lead to a mismatch in turnover between the two taxation laws and increase the income tax payable for the supplier.