Reimbursement – Whether Leviable to Tax in GST regime?

1. Sometimes it happens that a supplier incurs certain expenses (e.g. travelling) and seeks reimbursement of the same along with his charges from his customer. Such supplier shows the reimbursement amount separately in the invoice. Can he avoid GST liability on such reimbursement is the issue for discussion in the present article ?

2. Confusion stems from the fact that clause (g) of Sec. 15(2) of the Model CGST law (June version), which provided for including any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services in the value of supply, has been omitted in the final CGST Act, 2017 as passed by the Parliament. Can this omission signify that the reimbursements will not form part of the value of supply ?

3. Sec. 9(1) of the CGST Act, 2017 provides that the tax shall be levied on the value determined u/s 15 of the said Act. Relevant portion is reproduced below:

“Sec. 9. Levy and collection. — (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.”

4. Sec. 15 of the CGST Act, 2017 can be looked at as comprising of two parts. First part u/s 15(1) provides that the value of supply of goods or services or both shall be the transaction value. Second part u/s 15(2) on the other hand provides for various inclusions to the said transaction value. Hence we must answer whether the “reimbursements” can be included in any of the referred parts. We shall address the issue one by one.

5. Sec. 15(1) of the CGST Act, 2017 is reproduced below for ready reference:

“Sec. 15. Value of taxable supply. — (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”

6. Close reading of the above provision would entail that the value of supply shall be the price paid or payable “for the said supply” of goods or services in question. Can reimbursement be said to be the price paid or payable “for the supply” or not ?

7. To answer this question we must refer to the recent decision by Apex Court in the case of Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. (Civil Appeal No. 2013 of 2014). Said decision is in the context of erstwhile Service Tax Law. Charging provisions contained u/s 67 of the Finance Act, 1994 provided that value of taxable service shall be the gross amount charged by the service provider “for such service provided or to be provided”. Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 on the contrary provided for inclusion of reimbursements in the value of taxable service. Hon. Delhi High Court struck down the said Rule 5(1) on the ground that the same is ultra vires the provisions of law. It was held that Sec. 67 provides for levying tax only on the value for service provided. Reimbursement cannot be said to be the value for the service provided and hence Rule 5(1) is in conflict with Sec. 67. Said decision was challenged before the Apex Court. The Court held as under:

“In this hue, the expression ‘such’ occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasized that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.

This position did not change even in the amended Section 67 which was inserted on May 01, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of subsection (1). Mandate of sub-section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.”

8. Court also observed that an amendment has been made with effect from 14.05.2015 u/s 67 vide Finance Act, 2015 whereby Clause (a) which deals with ‘consideration’ was suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Hence the Court concluded that a substantial change has been brought with the referred amendment and will only have a prospective effect.

9. Sec. 15(1) of the CGST Act, 2017 provides that value of supply of goods or services shall be the price paid or payable “for the said supply” of goods and services. The language is similar to Sec. 67 of the Finance Act, 1994 (before the 2015 amendment) which provided that the value of taxable service shall be the gross amount charged “for such service provided or to be provided”. Hence applying the ratio of Apex Court decision (supra) we can conclude that the reimbursements shall not fall u/s 15(1) of the CGST Act, 2017.

10. Now we shall deal with the inclusions provided u/s 15(2) of the CGST Act, 2017. Relevant provision is reproduced below:

“Sec. 15(2) The value of supply shall include —

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;”

11. Above clause covers two types of inclusions. First type covers incidental expenses charged by the supplier to the recipient. Second type covers any amount charged for anything done by the supplier in respect of supply at the time of, or before delivery of goods or supply of services.

12. Reimbursements cannot be covered in the second type since the same cannot be said to be the amount charged in respect of anything done by the supplier. However in our view reimbursements will be included in the first type. This is because it covers all incidental expenses charged by the supplier. Reimbursement is clearly in respect of incidental expenses (e.g. travelling). Also reimbursement is charged by the supplier. It may be noted that to fall under the said type of inclusion it is not necessary that the incidental expenses must be for anything “done” by the supplier unlike second type of inclusion. Hence we are of the view that reimbursements will be included in the value of supply.

13. Before we part it is also worthwhile to point out that despite Sec. 15(2)(c) of the CGST Act, 2017 providing for including the value of reimbursements in the value of supply, the concept of “pure agent” is still survived vide Rule 33 of the CGST Rules, 2017. Hence if all the conditions stipulated under the said provisions are fulfilled, the value of reimbursements can still be excluded from the levy of tax.

14. If one compares the conditions for pure agent under GST regime vis-a-vis Service Tax regime one will notice that the following conditions stipulated under the earlier Service Tax regime (refer Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006) are missing in the GST regime:

“(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf”;

15. On the other hand following condition appearing in the earlier regime has been slightly modified in the GST regime:

“Earlier regime: (i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured

GST regime:  (i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient” 

16. Word “authorize” has been defined by Black’s Law Dictionary as to give authority to a person to act or to empower. It thus implies a legal direction given by one person to another to act in a certain way. Such direction can be given only if the person giving direction is obliged to act in a certain way and then can authorize someone else to act on his behalf. Now a recipient can authorize the supplier to make the payment to a third party only if such recipient is firstly liable to make the payment under the contract. Hence unless invoice of the third party is in the name of recipient, it will be difficult to exclude the same from the levy even if pure reimbursement is claimed.