Reimbursements under GST: Valuation rules under GST provides that reimbursement of expenses are subject to GST unless such expenditure is incurred as a ‘Pure agent’. Rule 33 of GST Valuation Rules 2017 and explanation thereunder provides certain conditions to be satisfied before one can be regarded as a ‘pure agent’ and to exclude the reimbursements from the value of supply.
Reimbursements under GST
Relevant portion of the Act and the Rules are reproduced for ready reference and important words or phrases are highlighted
33. Value of supply of services in case of pure agent
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
The term ‘Agent’ which has been defined under section 2(5) of CGST Act, 2017 as under:
“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.”
Analysis:
In so far as reimbursements are concerned, any person who receives goods or services on behalf of another could be regarded as agent. However, to exclude reimbursement from ambit of supply and thus exclude from incidence of GST, one should be a ‘Pure Agent’ who has secured prior authorisation and shows the reimbursement separately on the invoice. [Rule 33 above]
The explanation to the rule suggests pure agent shall enter into contractual arrangement before incurring the expenditure. Contract law recognizes that oral agreements can be valid too. But, issue arises when such contracts have to be proven to the satisfaction of auditor, tax authorities etc. unless they are reduced to writing. Clause (d) of the explanation suggests that if there is profit element or mark-up involved, then it ceases to be actual amount incurred and therefore subject to tax.
I would like to discuss reimbursement that involves services. Holding title to the goods is fairly understood in commercial world. But what constitutes “intend to hold” or “actual holding” of “title” qua Services is a tricky. One can only make an informed speculation and juxtapose our understanding of goods in relation to Services.
This is because, there is nothing tangible that can be held or against which one can assert her title. Practically speaking, if the invoice for service (to be reimbursed) is in the name of agent, then one can say he has assumed the ‘title’ for such services. Therefore such agent would not qualify as ‘pure agent’. Accordingly, such reimbursements are subject to GST. Another aspect provided in the explanation is, “does not use for his own interest”.
The expression “does not use for his own interest” as regards services, gives rise to multiple interpretations. For eg. a Service provider seeks reimbursement of travel bills. Although the service provider may have ‘used’ the travel service, one could assert that he did not use “for his own interest” but, to further the interests of his customer from whom reimbursement is sought (based on facts and circumstances). While, this argument is not without merit, it is hard to demonstrate through documentary evidences.
Every tax payer intends to avoid unwarranted battles with the tax authorities particularly when GST can simply be collected and discharged from the customer without any hassle. The ultimate effect is that this becomes accepted practice over time. Among other high priority matters, these minor issues gets relegated to the background. I wish to take up a real life example to provide further insights. Company is situated in an economic corridor connected by a major ‘toll road’.
As the toll itself is subject to GST at Nil rate, there is no requirement to pay GST to ply its fleet of buses (for employee transportation) when the company has a direct contract with the toll company. Ironically, it has to pay GST on toll charges when the same is sought for reimbursement by ‘rent a cab’ service provider. To begin with there is no incidence of GST on toll charges. Moreover, GST charged by Rent a cab service provider is blocked and cannot be availed as input tax credit in view of 17(5) of CGST Act. Isn’t this a case of double whammy? If GST is applied on reimbursement of toll charges, it is a straight cost that hits the P/L account, as it cannot be recovered.
Imagine hundreds of companies hailing thousands of rides from rent a cab service providers, in a place like Electronics city, Bengaluru including toll charges for reimbursement with GST. The collective amount of lost credits can be sizeable. I do not intend to argue the matter one way or another based on exiting legal provisions. Instead, I would like to draw your attention to something that is blatantly amiss in current scheme of things and emphasize the need for a more reasoned discussion in this regard. Remember times when TDS was deducted on gross amounts including VAT or Service Tax? Everyone realized this was incorrect on its face, but had to put up with the practice for years!
If one were to refresh the fundamental concept of GST, the tax should be levied on value addition at each stage. In principle, mere pass through of costs only affects multiple parties and cash flows, without affecting any value addition or economic substance. The Government would be happy to fill its coffers unless practicing professionals and the industry takes up these matters. The concept of ‘reimbursement’ subject to tax and ‘disbursement’ not being subject to tax is a fairly standard concept in other countries like UK and Singapore. In fact Singapore1 provides lengthy guidance on this subject which is noteworthy. The guidance note has detailed discussion on the subject, tabular formats for easy understanding, FAQs, a flow chart and 35 real life examples demonstrating difference between reimbursement and disbursements. To top it all, it is a living document recently updated in Feb 2018 and provides phone and email for further enquiries.
The author humbly suggests that India could do well by emulating some of the advanced economies by first seeking industry wide consultation on this little talked about subject, provide necessary relief in appropriate situations and come up with detailed guidelines that serves the purpose, both in letter and in spirit.