Is Out of Pocket Expenses liable to GST?

What is Taxable Value? 

Value of taxable supply – Sec 15 CGST Act 2017

(1) The value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the Supplier and the recipient of the supply are not related persons and The price is the sole consideration for the supply.

2) The value of supply shall include:

(a) Any taxes, duties, cesses, fees and charges levied under any statute, other than GST

(b) Amount supplier is liable to pay but which has been incurred by the recipient.

(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. 

(d) Interest or late fee or penalty for delayed payment

(e) Subsidies directly linked to the price excluding subsidies provided by the Govt. (Explanation: For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy)

(3) The value of the supply shall not include any discount which is given–

(a) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) After the supply has been effected, if—

(i) Such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) Input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed

Is Reimbursement Expenses liable to GST ?

Section 15(2)(c) of the CGST Act 2017

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.

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.

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.

Is Pure Agent Expenses Liable to GST?

Under Rule 33 of the CGST Rules 2017.

 A pure agent means a person who:-

1. 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.

2. Neither intends to hold or holds any title to the goods or services or both so procured or provided as pure agent of the recipient of supply.

3. Does not use for his own interest, such goods or services so procured.

The important thing to note here is that the pure agent does not use the goods or services so procured for his own interest. The fact that he did not use the goods or services for his own interest would be determined based on the facts of the case and would be determined from the terms of the agreement.

The amount received as reimbursement by the pure agent would be excluded from the value of supply as well as from aggregate turnover. As the amount of reimbursement of expenses would not be included in the value of supply, the supplier himself cannot charge GST on the same and would only charge the actual amount paid to the person to whom the payment has been made.

However, such exclusion of expenditure incurred as pure agent is possible only and only if all the conditions required to be considered as a pure agent are satisfied by the supplier in each case.

Apart from the above, the supplier would also be required to satisfy the following conditions:-

1. The supplier acts as a pure agent of the recipient, when he makes payment to the third party on authorisation by such recipient.

2. The payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service.

3. The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

In case the conditions are not satisfied, such expenditure incurred shall be included in the value of supply under GST.

Conclusion:-

1. Reimbursements will be included in the value of supply.

2. The amount received as reimbursement by the pure agent would be excluded from the value of supply as well as from aggregate turnover.