Generally, tax is levied only on the profit margin and not on any reimbursement amount (cost or expense), which we pay on behalf of the recipient to carry out the principal work. But this is not as simple as it looks. Let’s discuss the applicability of GST on reimbursement amount.
In GST, tax is charged on the value of taxable supply received or to be received for the supply of goods or services or both excluding the value of services charged as pure agent. The value of taxable supply is determined as per Section 15 of CGST Act along with Chapter IV of CGST Rules, which provide the rules and regulations to be followed while determining the value of taxable supply in specific circumstances.
Rule 33 of CGST Rules, 2017 states about the value of services in case of pure agent, which is as below:
“Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely-
(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;
(ii) 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; and
(iii) 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.
Explanation- For the purposes of this rule, the expression ―pure agent, means a person who-
(a) 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;
(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;
(c) does not use for his own interest such goods or services so procured; and
(d) 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.”
Accordingly, any amount charged as a pure agent shall be excluded while determining the value of taxable supply under GST.
Illustration- X firm is engaged to handle the legal work pertaining to the incorporation of Company Y. Other than its service fees, X also recovers from Y, registration fee and approval fee for the name of the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for the registration and approval of the name are compulsorily levied on Y. X is merely acting as a pure agent in the payment of those fees. Therefore, X‘s recovery of such expenses is a disbursement and not part of the value of supply made by X to Y.
Recently, Hon. Karnataka AAR has passed an order in case of M/s Goodwill Auto’s (KAR ADRG 44/2021 dated 30.07.2021) that:
“….The contract entered between the applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having a fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge is the charge for diesel used. Both are the part of the same consideration and is for the contract of supplying DG Set on hire. Though it appears that the applicant is receiving the reimbursement of the diesel cost, the recipient is not paying for the diesel but for the services of the DG Set, which is an integral part of the supply of DG Set rental service. There is no separate contract for supply for supply of diesel and the invoice issued for the reimbursement of diesel is nothing but a supplementary invoice issued for the supply of rental service of DG Set. Hence, consideration for reimbursement of expense as cost of the diesel for running of the DG Set is nothing but the additional consideration for the renting of DG Set and attracts CGST @9% and KGST @9%….”
Consequently, the reimbursement of diesel in above case has to be included in rental value of DG Set as reimbursement is considered as the integral part of providing the rental service of DG Set.
Opinion:
1. To avoid litigations, better to make separate contracts for principal supply and for reimbursement of cost or expenses.
2. To avoid litigations, better to issue separate invoices for principal supply and for reimbursement of cost or expenses.
3. All specified conditions of the pure agent must be fulfilled.
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Is GST applicable on Group company transactions like – Insurance for testing vehicle, Fuel charges for testing vehicles (vehicle is in name of A company but B company is using for testing purpose. A & B is group companies)