CA Bhanu Prudhviraj
The government of India had unleashed its ambitious target to create one tax one nation and one market with implementation of GST. Though the number of taxable assesses and GST collections had shown upward trend in recent days, there are several unanswered questions with respect to the problems faced by the assesses in their day to day operations. In this brief write up we will try to look into the issues with respect to GST implications on pure reimbursable expenses incurred by the pure agent on behalf of his principal.
Schedule I of CGST Act has categorically included supply of goods between principal to agent and vice versa under the ambit of supply even it is made without consideration. The supply of services between the principal and agent was absent in the said schedule.
It is pertinent to note here that Rule 33 of CGST rules 2017 has excluded the value of supply of services in case of pure agent, where pure agent makes the payment to the third party on behalf of the principal and the value of the same has to be separately disclosed in the invoices issued by the pure agent.
For a supplier to be treated as a pure agent there must be a contractual agreement to incur such expenditure in the course of supply of goods or services and he neither intends to hold any title to the goods / services nor entitled to get any sum over and above his commission as per terms of the engagement.
Though the said conditions stipulated above are satisfied by many service providers viz: steamer agents, clearing and forwarding agents etc but many such pure agents are charging GST on pure reimbursable expenses due to transfer of input tax credit on such reimbursable expenses to their principal.
For example: A is rendering Customs House Agent Service (CHA) to B. As per the terms of contractual agreement, A incurs following expenditure on behalf of B as a pure agent which are as under:
|Particulars||Amount of Expenditure||GST paid|
|Customs clearing fees||50,000/-||9000/-|
In the above example, the tax invoices were raised in the name of A holding valid licenses for customs clearance and Port fees. In this scenario, B cannot avail ITC of Rs.27,000/- on GST paid by A. Since, the tax invoices were not in the name of B. Therefore, pure agent A is compelled to raise taxable invoices on B for sole benefit of availing ITC of as per the provisions of Section 16 of CGST Act.
However, this expenditure of pure reimbursable expenses was specifically excluded from value of supply under Rule 33 of CGST Rules. These arrangements between Principal and agent had inflated the taxable turnover of Agents in their GST Returns.
Another contradiction arose from Income Tax Act in this context. Income Computation Disclosure Standards (ICDS) are required to be complied by the tax assesses deriving income from heads “Profits and gains of business or profession or Income from other sources.”
ICDS 4 deals with method of revenue recognition arising in the ordinary course of business of a person from the sale of goods, rendering of services, the use of resources of the person’s resources yielding interest, royalties or dividends. The definition of “Revenue” under ICDS 4 has categorically stated that in an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.
Therefore, the pure reimbursable expenses of pure agent are not recognised as revenue as per provisions of ICDS 4. Accordingly, revenue of commission agent merely includes gross commission income which is in line with 26AS Statement of Commission Agent where TDS is deducted under 194H on commission income.
The divergence between 26AS Statements under IT law and GST Returns of Agent in the above context may result in unnecessary tax litigation to the agents which tax authorities should address on top priority basis by including suitable line items for reimbursable expenses in GSTR and issue suitable guidelines for availing ITC on such reimbursable expenses incurred by pure agent.
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