GST liability on Commission Agents/brokers

Goods and service tax is a revolution in the Indian History There are many aspects in Goods and service Tax and one of the main areas where lot of doubts and question arises is whether GST is attracted on commission and brokerage.

“Commission typically refers to income earned by a person for arranging a transaction between two parties and earning a percentage of the sales proceeds. The commission earned in such a scenario is taxable under GST as a service at 18%,”

GST registration applies to all commission and brokerage income irrespective of the turnover limits of the taxpayer. “Persons who make taxable supplies of goods or services or both on behalf of other taxable persons whether as an agent or not are required to take registration regardless of turnover,”

Generally, an “intermediary’ is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two suppliers at any one time:

(i) the supply between the principal and the third party; and

(ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying agent or selling agent, or a stockbroker) is excluded by definition.

Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as “the main service”), but provides the main service on his own account.

“Nature and value: An intermediary cannot alter the nature or value of the services, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal.

Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”.

Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable.

Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the ‘main service’.”

Commission agent under GST

Section 2 sub-section (5) of the CGST Act, 2017: – As per Section 2 sub-section (5) of the CGST Act 2017, “agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

As per Section 7 of the CGST Act read with the Schedule I, ‘Supply of goods, by a principal to his agent or by an agent to his principal, where the agent supplies such goods on behalf of the principal’ is chargeable to GST even if made without consideration, but for conducting business.

The definition of an agent, as discussed above, includes ‘supply or receipt of goods on behalf of the principal’. Thus, a principal-agent relationship is an essential factor for determining whether a transaction is covered under the definition of an agent.

It is essential to understand whether the agent is carrying out the activity as a representative, i.e. ‘supplying or receiving the goods on behalf of the principal.’ The key criteria for determining the existence of a principal-agent relationship is ‘how an invoice is raised?’.

• If an invoice is raised in his name (agent’s name) – It would be covered under Schedule I transactions and thus liable to GST.
• If an invoice is raised in the name of principal – Not covered under Schedule I.

There are different types/categories of Agent and one should know this

Types/Categories of Agent:

Commission agent: If a person is working as a real estate broker and getting a commission of 1% on the sale of every property, then he will be identified as a commission agent under the CGST Act.

Carry & Forwarding Agent: A newspaper company appoints a person as a C&F agent to transport their newsprint from their printing press to all the depot across the State. The goods are sent by the company to him on issuing an invoice. The deputed person may hire some third party to execute the task and issue invoices in the name of the firm for which he is appointed as C&F agent. If he has the authority to pass/receive goods on behalf of the original company, he is designated as C&F Agent for the company.

Pure Agent (Rule 33): A pure agent is one who makes a supply to the recipient and also incurs expenditure on behalf of the recipient for other ancillary services and claims reimbursement of the same without adding it to the value of his supply. Here, the relationship between the service provider and service recipient is on a principal-to-principal basis. But, for ancillary services, it is that of a pure agent. As per the Valuation Rules of GST, expenditure incurred as a pure agent will be excluded from the value of supply.

Liability of Principal and Agent under GST

In the case where an agent supplies goods on behalf of his principal, then both principal and agent are jointly and severally liable to pay GST on such taxable goods. For example, if M/s X appoints Mr Y as an agent to sell its goods. Mr Y sells such goods to Mr Z on behalf of M/s X. In this case, M/s X and Mr Y are jointly and severally liable to pay GST on such goods, if either of them fails.

GST at 18% is applicable to all taxable value of supply provided by an agent, including the sale/purchase of advertising space/time.

Following is some of the services provided for a fee/commission or on a contract basis:

• Sale of land/building.
• Any retail/wholesale trade service.
• Property management service.
• Real estate appraisal service.
• Commission agent services to negotiate wholesale commercial transactions.

Usually, a supplier of goods/services is required to pay GST. But, in some cases, a recipient of goods/services is required to pay GST called a reverse charge mechanism. Services provided by a broker or a commission agent to the following individuals are covered under reverse charge mechanism:

• Bank
• Financial institution

Principal-Agent Liability

When the commission agent/broker supplies any services/goods on behalf of the principal owner, then both are jointly liable to pay the GST on the taxable goods.

“One of the key pointers to identify whether a person is an ‘agent’ or ‘principal supplier’ is to follow the document trail of invoicing. To establish the ‘agency’ requirement, the invoice for the original supply should be raised by the supplier and not by the agent,”

Each contract has to be analyzed separately to establish the tax taxability of commission and brokerage.

“To ensure that only the commission portion of the transaction is taxed at the hands of the commissioning agent and not the entire sales proceeds, the commissioning agent should ensure that he is acting only as an ‘agent’ of the original supplier and not carrying out the supply on a principal-to-principal basis,”

 Under GST the supplier of goods/services is required to pay GST. However, at times even the recipient of goods/services is required to pay GST. This is known as the reverse charge mechanism. Services provided by a broker or a commission agent to banks and other financial institutions are covered under reverse charge mechanism.

Agent – compliances under GST:

Registration under GST applies to all commission and brokerage income irrespective of the turnover limits of the taxpayer. The threshold limit condition for registration does not apply to commission agents. So, a person is required to obtain compulsory registration once he falls under the definition of an agent as mentioned above. He can register himself as an NRTP (Non-Resident Taxable person) if he is making a taxable supply in India. However, if an Indian exporter pays a commission to an FCA (foreign commission agent), he is not liable to pay GST as the place of supply is out of India and reverse charge does not apply to Indian exporters.

Composition Scheme and Commission Agent:

The composition scheme was earlier available only for the suppliers of goods, but the scheme is now available for service providers as well as vide CGST (Rate) notification no. 2/2019 dated 7th March 2019. Thus, brokers and commission agents with an annual aggregate turnover of up to Rs.50 lakh can opt for composition schemes. Opting for composition schemes will reduce the compliance burden of small taxpayers.

Any registered commission agent is required to file the below returns under the GST Act:

> GSTR-3B – Monthly summary return.

> GSTR-1 – Return for reporting outward supplies.

> GSTR-9 – Annual return.

> GSTR-5 and GSTR-5A – Non-resident foreign taxpayers.

Maintenance of Books of accounts: All agents are required to maintain accounts showing details of:

• Authorisation from principal to supply/receive goods on his behalf.
• Quantity and value of goods/services received on behalf of the principal.
• Details of accounts furnished to the principal.
• Taxes paid on supply/receipt of goods/services on behalf of the principa

Exemptions under GST:

There are a few services provided by commission agents that are exempt from GST. This includes the services provided by fair price shops (those licensed to distribute essential commodities by an order issued under section 3 of the Essential Commodities Act, 1955, to the ration card holders under the Targeted Public Distribution System) to the Central Government on sale of rice, wheat, and other coarse grains and to the state government or Union Territories on sale of kerosene, sugar, edible oil, etc.

Apart from this, support services to agriculture, forestry, fishing, and animal husbandry are also exempt from GST. Meanwhile, services under cultivation of plants and rearing of all life stock (except horse), such as the following are also eligible for due exemption:

• Direct agricultural operations
• Farm labour supply services
• Certain agricultural processes like tending, pruning, cutting, harvesting, drying, sun drying, etc.
• Renting/leasing of agro machinery or a vacant land
• Warehousing and storage activities of agricultural produce
• Extended agricultural service
• Services provided by an Agricultural Produce Marketing Committee

Here, the important point is whether the agent has the authority to pass/receive the title of goods on behalf of the principal. Let us understand better with the help of below scenarios.

Example 1

‘X’ is a manufacturer and supplier of machines. ‘Y’ helps ‘X’ in locating potential client ‘Z’ to sell his machines and finalises the contract of supply of machines by ‘X’ to ‘Z’. In consideration for his services rendered to ‘X’ , ‘Y’ charges commission for which he invoices ‘X’ and the payment of the same is released by ‘X’ to ‘Y’.In this example , ‘X’ and ‘Z’ are the two parties transacting in the supply of goods or services (i.e. main supply). In this arrangement, ‘Y’ is providing the ancillary supply of arranging or facilitating the ‘main supply’ of machinery between ‘X’ and ‘Z’ and therefore, ‘Y’ is an intermediary and is providing intermediary service to ‘X’.

Example 2

‘A’ and ‘B’ have entered into a contract as per which ‘A’ needs to provide a service of, Annual Maintenance of tools and machinery to ‘B’. ‘A’ subcontracts a part or whole of it to ‘C’. Accordingly, ‘C’ provides the service of annual maintenance to ‘A’ as part of such a sub-contract, by providing annual maintenance of tools and machinery to the customer of ‘A’, i.e. to ‘B’ on behalf of ‘A’.

Even though ‘C’ is dealing with the customer of ‘A’, but ‘C’ is providing the main supply of Annual Maintenance Service to ‘A’ on his own account, i.e. on a principal to principal basis. In this case, ‘A’ is providing the supply of Annual Maintenance Service to ‘B’, whereas ‘C’ is supplying the same service to ‘A’. Thus, supply of service by ‘C’ in this case will not be considered as an intermediary.

Example 3

An insurance company ‘P Co.’, located outside India, requires to process insurance claims of its clients in respect of the insurance service being provided by ‘P Co.’ to the clients. For processing insurance claims, ‘P Co.’ decides to outsource this work to some other firm.

For this purpose, ‘P Co.’ approached ‘Q’, located in India, for arranging insurance claims processing service from other service providers in India. ‘Q’ contacts ‘R’, who is in business of providing such insurance claims processing service, and arranges supply of insurance claims processing service by ‘R’ to ‘P Co.’. ‘Q’ charges ‘P Co.’ a commission or service charge of 1% of the contract value of insurance claims processing service provided by ‘R’ to ‘P Co’. In such a case, the main supply of insurance claims processing service is between ‘P Co.’ and ‘R’, while ‘Q’ is merely arranging or facilitating the supply of services between ‘P Co.’ and ‘R’, and not himself providing the main supply of services. Accordingly, in this case, ‘Q’ acts as an intermediary as per definition of sub-section (13) of section 2 of the IGST Act.

Example 4

Mr X appoints Mr Y for purchasing certain goods. Here, Mr Y identifies Mr Z as a supplier and asks him to supply the goods to Mr X by raising an invoice on Mr Y Thus, Mr Y is not involved anywhere, and so he does not fall under the definition of an agent as per Schedule I.

But, in a similar situation, if Mr Y obtains the delivery of goods from Mr Z on behalf of Mr X where Mr Z raises the invoice on Mr Y, then such a transaction is covered under the definition of agent and is a supply under Schedule I.

Example 5

Mr Chand is an auctioneer appointed by M/s Jai Hanuman Traders to auction certain goods. Mr Chand identifies a few potential buyers and carries out the auction process. Here, M/s Jai hanuman traders’ issues goods to the highest bidder by raising an invoice in the name of the bidder. Thus, Mr Chand is nowhere involved in the supply of goods, and so he does not fall under the definition of supply as per Schedule I.

In a similar situation, Mr Chand issues the goods on behalf of M/S Jaii  Hanuman Traders to the highest bidder and also raises the invoice in his name (i.e. Mr Chand). Here, Mr Chand is not only providing auctioneering services but also has an authority to transfer the title of goods on behalf of M/s Jai Hanuman Traders and thus, this transaction is covered under the definition of supply as per Schedule I.

Comparison of taxes before and after GST

Let us understand how a commission agent was charged to tax earlier under the Service tax regime and now under GST with the help of an example.

(Amount in Rs)

Particulars	Taxed Under Service Tax Regime (Rs)	Taxed Under GST (Rs)
Value of taxable supplies	5,000	5,000
Service tax @ 15%	750	–
CGST @ 9%	–	450
SGST @ 9%	–	450
Total GST	–	900
Invoice Value	5,750	5,900***

*** the introduction of GST has increased the tax burden on brokers and commission agents.

Value of Supply:

The value for the calculation of GST for an agent is different for each of the below cases:

As Sole Agent (Rule 29): In case of supply made as a sole agent, the value of supply shall be:

• The open market value of goods supplied
• 90% of the price charged for the supply of goods of a similar kind by the recipient to his customer (not being a related person) where the goods are intended for further supply by the recipient.

Other Important aspects in respect of Commission Agent:

Invoicing Requirements for Brokers and Commission Agents An agent is required to issue a tax invoice for the supply of its services. In the case of exempt supplies, he can issue a Bill of Supply. Further, the SAC code should be mentioned on the tax invoice as per the turnover limits:

√ Up to Rs 5 crore – Mandatory for B2B tax invoices – Four digits

√  Up to Rs 5 crore – Optional for B2C tax invoices – Four digits

√  Greater than Rs 5 crore – Mandatory for B2B tax invoices – Six digits

E-Way Bill Requirements: A pure agent is required to generate e-way bills if he is also working as a transporter, and the consignor/consignee does not generate the e-way invoice.

e-Invoicing Requirement: If the agent is earning more than the threshold limit notified, as annual turnover in any FY from FY 2017-18, then he/she must comply with the e-invoicing system.

Some important areas of GST on Commission

Received commission from a foreign company in foreign currency kindly guide from GST and Income Tax perspective: Receiving commission from outside India, it must be case of Export of service. Export of service is also considered as inter-state service; therefore, registration will be required when aggregate turnover crosses the threshold limit i.e., Rs. twenty lakhs during a financial year.

As per Section 2(6) of IGST Act, 2017, export of services” means the supply of any service when, ––

> the supplier of service is located in India;

> the recipient of service is located outside India;

> the place of supply of service is outside India;

> the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India and

> the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

If the above conditions are satisfied, service supplied by a taxpayer will covered under Export of service. The above service will fall under section 16 of the IGST Act, as Zero-rated supply and can be made on payment of IGST or without payment of IGST (in case of LUT/Bond).

Intermediaries & Export of service:

In the erst while regime commission agent was taxed to service tax for services provided to foreign principal for the intermediary services he does. In order to bring parity with the commission agent for services, w.e.f. 01.10.2014, the commission agent for goods where such services provided to foreign principal were covered under intermediary services and taxed to ST under Rule 9 of Place of Provision of Service Rules (POPS).This change had led to service tax being demanded on commission agent services though booking of orders for goods with Indian customers was done for foreign principal and commission received in convertible foreign exchange. Under GST regime also intermediary services to foreign principals were continued to be taxed.

In several countries like Sri Lanka, Thailand as well as the European Union, the intermediary service whether for goods or services has been based on the place of the customer/ recipient. Destination principle was followed. Representations were done by industry/consultants that in line with international best practices all services which are B to B could have been given based on location of customer in 2014/15 and again in 2016/17 in GST. However, though there was lot of talk, there was no relief given and the only option for commission agents was to factor the tax into costing.

Some important case laws on intermediary services:

1. Bombay High Court

Dharmendra M. Jani vs The Union of India and 3 Others on 16 June, 2021

According to the petitioner, it is a service provider. It provides service to customers located outside India. These overseas customers are engaged in manufacture and / or sale of goods. Such overseas customers may or may not have establishments in India. However, petitioner provides services only to the principal located outside India and in lieu thereof receives consideration in convertible foreign currency from the principal located outside India. For providing such services, ordinarily an agreement is entered into with the overseas customers.

The contention of the petitioner that it would amount to double taxation is also not tenable in eyes of law because the services provided by the petitioner as intermediary would not be taxable in the hands of the recipient of such service, but on the contrary a commission paid by the recipient of service outside India would be entitled to get deduction of such payment of commission by way of expenses and therefore, it would not be a case of double taxation. If the services provided by intermediary is not taxed in India, which is a location of supply of service, then, providing such service by the intermediary located in India would be without payment of any tax and such services would not be liable to tax anywhere. In such circumstances, the contentions raised on behalf of the petitioner are not tenable in view of the Notification No.20/2019 issued by the Government of India, Ministry of Finance whereby Entry no.12AA is inserted to provide Nil rate of tax granting exemption from payment of IGST for service provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory i.e. India. Therefore, the respondents have thought it ft to consider granting exemption to the intermediary services viz. service provider when the movement of goods is outside India.

In view of the foregoing reasons, it cannot be said that the provision of Section 13(8)(b) r.w. Section 2(13) of the IGST Act,2017 are ultra vires or unconstitutional in any manner. It would however, be open for the respondents to consider the representation made by the petitioner so as to redress its grievance in suitable manner and inconsonance with the provisions of CGST and IGST Act.  Section 13(8)(b) nor Section 8 (2) of the IGST Act are unconstitutional. Also neither Section 13 (8) (b) nor Section 8 (2) of the IGST Act are ultra vires the IGST Act. Section 13 (8) (b) is also not ultra vires Section 9 of the CGST Act, 2017 or the MGST Act, 2017. Section 13(8)(b) as well as Section 8(2) of the IGST Act are constitutionally valid and operative for all purposes.

2 Gujarat High Court upholds constitutional validity of “place of supply” provisions under GST law for intermediary services based on “location of supplier.

The petitioner had filed a writ petition1 challenging the constitutional validity of section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) as ultra vires Articles 14, 19, 265 and 286 of the Constitution of India. Section 13(8)(b) of the IGST Act provides the place of supply for intermediary services rendered to overseas customers as the “location of the supplier” even if the consideration is earned in foreign exchange.

While holding that the place of supply for intermediary services as the location of supplier under section 13(8)(b) of the IGST Act not ultra vires the Constitution of India, the Gujarat High Court observed the following:

The High Court has stated that there is no double taxation on intermediary services, which may be challenged. This would depend on facts and the law prevalent in the recipient’s country, which may not be uniform. The OECD commentaries on VAT/ consumption taxes also examine situations of double taxation or double non-taxation, depending on each country’s VAT laws, and unlike the income-tax law, there are no tax treaties for the avoidance of double taxation in indirect tax laws. Considering the High Court’s observation that the Revenue can consider representations to redress grievances and the past recommendations of various committees, it will be important to represent this issue with an exhaustive analysis of the double taxation aspect also. Interestingly, the High Court has stated categorically that the intermediary services are liable to Central GST and State GST and not IGST. Thus, it becomes necessary to evaluate the position that companies adopt for such transactions, considering this judgement.

3. Punjab-Haryana High Court

Genpact India Pvt. Ltd vs Union Of India And Others on 11 November, 2022.

Challenge in the instant petition is to the order dated 15.02.2021 (Annexure P-18) passed by the Additional Commissioner CGST (Appeals) Gurugram wherein it has been held that the services provided by the petitioner are in the nature of “Intermediary Services” as per Section 2 (13) of the IGST Act (for short the ‘Act’) and do not qualify as “export of services” in terms of Section 2 (6) of the Act and thereby rejecting the refund claim of un-utilized Input Tax Credit (ITC) used in making zero rated supplies of services without payment of Integrated Goods and Service Tax.

For the reasons recorded above, we are of the considered view that the impugned order dated 15.02.2021 (Annexure P-18) holding the petitioner to be an “intermediary” under Section 2 (13) of the IGST Act, cannot sustain. The same as such is quashed and consequently the order in original dated 14.03.2019 (Annexure P-3) granting refund of Rs.26,34,61,625/- in favour of the petitioner is restored. It is further directed that the benefit of this order shall ensure to the petitioner for grant of subsequent refunds as well. Writ petition is allowed in the aforesaid terms.

Board Circular Under GST Clarifying Various Aspects

It is important to note that under GST, there were various inconsistent Advance Rulings on the nature and scope of Intermediary. For illustration, the Appellate Advance Ruling Authority in the case of Vservglobal Private Limited15 held that the activity of back-office support services, payroll processing, maintenance of records of employee would amount to Intermediary Service. Further, Appellate Advance Ruling Authority in the case of Global Reach Education Service Pvt Limited16 it was held that Promotion of courses of Foreign University in India on consideration based on certain percentage of fee paid by admitted students to the said university would qualify as Intermediary Service.

Similarly, the Karnataka Appellate Advance Ruling Authority in the case of Airbus India17 held that various support functions / activities in relation to procurement of goods viz. review of Indian supplier landscape, conducting supplier onsite assessments, reporting any unethical practices of suppliers, providing market information, checking quality standards etc. are in the nature of intermediary services.

In order to provide clarity on these issues, the Board has recently issued a circular providing some clarity on the subject. The circular provides the following primary requirements for ‘intermediary’ –

(i) An intermediary essentially “arranges or facilitates” another supply (the “main supply”) between two or more other persons and, does not himself provide the main supply. Ergo, there must be minimum three parties in an Intermediary transaction.

(ii)  There are two distinct supplies in case of provision of intermediary services i.e. (i) main supply, between the two principals, which can be a supply of goods or services or securities; and (ii) Ancillary supply, which is the service of facilitating or arranging the main supply between the two principals.

(iii) Intermediary service provider to have the character of an agent, broker or any other similar person: The use of the expression “arranges or facilitates” in the definition of “intermediary” suggests a subsidiary role for the intermediary. It must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply. Thus, the role of intermediary is only supportive.

(iv) Intermediary does not include a person who supplies such goods or services or both or securities on his own account: It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal-to-principal basis, the said supply cannot be covered under the scope of “intermediary”.

(v) Sub-contracting for a service is not an intermediary service.

(vi) The specific provision of place of supply of ‘intermediary services’ under section 13 of the IGST Act shall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India.

Thus, while the aforesaid circular provides some clarity on various aspects of the Intermediary Services. Having said that various legal issues are still left open despite the abovementioned circular.

Conclusion:

To conclude the ideal solution would be to remove section 13(8)(b) of the IGST Act and prevent designating place of supply as location of the supplier in case of export of intermediary services. This will mean that place of supply will be location of recipient and thus, would be out of the purview of tax net in India. Alternatively, it is proposed that an amendment could be made to replace intermediary services in 13(8) (b) with “services in nature of an agent or broker” for the sake of clarity.