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Reimbursement involves being repaid of what has been spent and restoring to an equivalent of something which has been paid. ‘Reimbursement expenses‘  have always been a point of debate in indirect tax laws.

It is associated with the consideration flowing from one person to another and whether it forms a part of consideration or not will be decided based on facts and circumstances of each case.

Various perspectives in GST with respect to reimbursements are discussed below:

  • Whether it satisfies the Consideration criteria- any payment in respect of, or in response to, or for inducement of the supply of goods or services. It need not be in terms of money alone.
  • Exclusion from value of supply is supply as a pure-agent: Test of pure-agent:
    • the supplies procured are in addition to supplies made on his or her own account
    • the payment is made to the vendor as an agent of the recipient and
    • the payment is indicated separately on the invoice issued by the supplier
    • If the above conditions are applicable for effecting a supply, an agreement should be entered with the recipient of supply. It should also be established that one does not hold any title to the goods or services procured as pure agent, does not use the goods/services for his own interest and no more than the amount expended by him is received from the recipient. If pure agent
  • In case of cross-charge within entities, pure-agent concept may not hold good and one may have to discharge their GST liability on the services/goods obtained on behalf of another distinct person. The underlying criteria for pure-agent is that the supply of pure agent services shall be ancillary to the main supply. Pure agency itself cannot stand as the only supply in a transaction. On the contrary, if it can be argued that there is no underlying supply for the payment made between distinct entities, the consideration would not come under the ambit of GST. For instance, services received at the branch and payment by HO would not amount to a taxable transaction between HO and Branch as there is no supply involved between them, with respect to the service received at the branch by a third party supplier (though there may be HO-Branch service involved).
  • There is no fixed formula for determining the taxability of cost-sharing arrangements between entities. Taxability of Overheads allocated by the Head office depends on the components of overheads allocated by the Head office. Possibilities do exist that there are multi-layered allocation of overheads, depending on hierarchy and the complexity of the organization. One has to carefully understand the basis for cost-sharing. For instance, distribution of electricity charges will not attract GST. However, a fixed percentage cost being allotted will lead to taxability of the charge being allocated. This would applicable even if it is a mere accounting entry. Attention is also invited to the Advance ruling in the case of Columbia Asia Hospital where it was held that the activities performed by the Head office in the course of or in relation to employment for units shall be regarded as supply and such costs shared would attract GST. The applicability of Schedule III, Entry-1-services from an employee to an employer was ruled out
  • Allocation of common expenses incurred by a taxable person, in relation to procurement of services used by the branches may qualify as supply of service and would be subject to GST.

To conclude, there is no thumb rule for determining the taxability of GST in reimbursements. Documentation work involved behind a reimbursement transaction has to be conscientious and punctilious, for it is the arguments in the court of law supplied with the document which saves the taxpayer from a predicament.


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July 2024