CA Ashish Agrawal, CA Amit Jindal

CA Ashish Agrawal and CA Amit JindalAs per Rule 5(1) of determination of value rules 2006,

“Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.”

Further to it, Rule 5(2) of Determination of Value Rules, 2006 exempts a pure-agent to charge service tax on any service rendered to the recipient as pure agent. An exhaustive list of conditions are provided which needs to be satisfied before it can be called as a service of pure-agent. Therefore, except for certain services like payment of taxes, ROC fees on behalf of client, it almost did not cover any other situation.

The examples provided by statute in the rules clarified the  that reimbursements shall become part of taxable services. One of the example is:

A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.

Rule 5(1) was disputed in a writ petition filed in Delhi court in the case of Inter continental Consultants and Technocrats Ltd vs Union of India”, decided in Nov 2012, reported in [2013 (29 ) STR 9 (Del.)].

In the above case:

The petitioner is a company providing consulting engineering services. It specialises in highways, structures, airports, urban and rural infrastructural projects and is engaged in various road projects outside and inside India. In the course of the carrying on of its business, the petitioner rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients.

Delhi HC in it’s ruling stated rule 5(1) as ultra-vires the Act and therefore no service tax was to be applicable on reimbursements. It is sub judice in Supreme court presently as appeal was filed by department.

The government in order to avoid any further legal issues went to amend the definition of “Consideration” in section 67 through Budget 2015 and added “ any reimbursable cost or expenditure incurred by the service provider” in clause (a).

Therefore it is ample clear from the above provisions that the intention of government is to cover reimbursements as part of consideration and service tax shall be liable on it.

GST Postion

Section 15 read with rules provides for valuation of taxable supplies in GST. Coming on to specific portion relevant to reimbursements, clause (b) and (c) of sub-section 2 provides to include (i) Expenses incurred by recipient but which supplier was liable to pay

(ii) Incidental expenses and expenses for anything done by supplier in respect of supply of goods or services

as the the part of valuation of supplies.

Also definition of consideration contained in section 2 (31) of CGST Act is

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient  or by any other person but shall not include any subsidy given by the Central Government or a State Government;

 (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other  person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall  not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply

Further to it Rule 7 of Valuation rules contain provisions of pure-agent which are similar to present provisions.

Therefore, the situation in  GST regime is similar to what was existing before amendment in budget 2015, which implies a disputed position on reimbursements.


The government needs to clarify stand on reimbursements so as to avoid any eventual hassles.

More Under Goods and Services Tax


  1. satish gaonkar says:

    i have engaged interior designer to do interior designing of my new flat. let me know whether i should pay gst for the goods he purchased to do interor of my flat .is there any gst i should pay for him.if so what are they. and let me know whter these
    gst expences are exempted in income tax
    my e mail is [email protected]
    satish gaonkar

  2. mukesh says:

    Contract of manpower supply, contractor supply manpower to the firm. principle employer is liable to pay PF.
    but principle employer reimbursement of pf expenses of employer part to the contractor and contractor pay PF. contract having own PF number.
    Is GST is applicable on pf reimbursement ?

  3. vishwajeet says:

    Hi, Telephone bill, hotel bills or mobile bills were paid inclusive of GST by employee and same expenses incurred were reimbursed to the employee.So, whether to charge gst on such reimbursement or charge gst under reverse charge mechanism.
    GST was already paid to Govt on such expenses.

  4. lily says:

    we are custom house broker, need to know if reimbursement and our taxable invoice can be made in one invoice or they have to be separate under the gst. pls advice

  5. Deepak S says:

    Hi, We are in training industry, normly we billling the reimbursement expenses like travel, hotel stay, etc to the client, just want check that, do we need to add the GST on this reimbursement expenses bill.

  6. v.k.saboo says:

    Professional fee and expenses are commonly interrelated. If valuation of service include expenses than full amount is taxable.
    Govt is getting good revenue from service tax but there is no cheap legislation or forum where one can file complain/ get his agreed remunerations. Agreed fees and expenses are denied or not paid by recipient in several cases. Now we will be bound to pay GST even if not collected.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2021