GST is chargeable on supply of goods and services. There are some payments/receipts which are reimbursement of expenses in relation to supply of the main service/goods. In this article we are discussing whether such reimbursement will attract GST or not.
What is reimbursement of Expenses?
Reimbursement means recovery of an expense that is incurred by a person from another person under a contract.
Example: A employee went to business tour and incurred some travelling expenses, later he claimed all such expenses as per company policy.
Another example is, a company hired an tax auditor, while auditing he incurred some good expenses, which he later claimed from the company.
When reimbursement under GST is taxable?
GST is also chargeable for ancillary services (services provided other than the principle supply) related to main supply of goods & services.
For example: A tax consultant hired for filing GST returns and he also provides GST software to keep record of all such returns, and claim expenses for such software from company, then it will also be taxed under GST.
Another example is that, a transporter packs goods and transport such goods with insurance for such goods. Here Principal/Main supply is goods. Packing and insurance are ancillary.
Such supply containing two or more supplies, are classified as composite supply or mixed supply. Both are taxable under GST.
When reimbursement under GST is not taxable?
When the suppliers of goods & services act’s as a pure agent of the recipient, then such ancillary services are not liable to GST, as it does not constitute a supply.
Who is pure agent under GST?
Pure agent is one who is making an ancillary service apart from the main supply of goods & service on request of the recipient, then this ancillary service would not be liable to GST, provided that the pure agent is reimbursed for the ancillary service so provided on special request of recipient. Sec 15 of CGST act 2017 discusses the value of services supplied as pure agent.
As per Rule 33 says “pure agent” is a person who –
- 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;
- neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply;
- does not use for his own interest such goods or services so procured; and
- 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.
A pure agent can be a commission agent, broker, mercantile agent, etc., who supplies goods or services on behalf of the other person. Any other ancillary services provided other than main supply can attract relationship of a pure agent between them, provided that the pure agent gets reimbursed.
Mr. A purchases a TV from Mr. Y at an agreed amount of Rs. 70,000. Mr. B requests to deliver the article to his premises. Mr. C is a supplier and he hires a transporter to deliver to the premises of Mr. A.
The cost of transport is Rs. 500, this transport charges will first be borne by Mr. B and then he would get it reimbursed by Mr. A Hence the final liability of transport falls on Mr. A.
In this case, the sale of article of Rs. 70,000 is the main supply and GST would be charged on Rs.70,000.
For the the transport service, as the transport service is provided on request of Mr. X & Mr. Y gets the reimbursement from him of Rs. 500, so this would be regarded as an ancillary service and Mr. Y will be called a pure agent, in this ancillary service would not be liable to GST.
Mr. A purchases a Fridge from Mr. B at an agreed amount of Rs. 43,500, and the agreement between them was for both purchase & transportation, then in this case Mr. Y would have performed the services of transporter on his own account, and in this case he would not be considered as a Pure agent.
Various Expenses in Reimbursement under GST
There are several types of expenses which are covered in reimbursement under GST.
It is an expense incurred during the performance of some professional work.
Any expenses paid by a professional on behalf of its clients/customers and gets the reimbursement of the same, then that professional will be regarded as a pure agent of his clients.
Example- M/s ABC Ltd. want ‘s to file his GST return so he approaches Mr. Bhatt who is a qualified CA agreed on professional fees of Rs. 80,000. Mr. Bhatt asses his documents and tax payable comes upto Rs. 70,400, and due to last day of tax payment, M/s ABC Ltd request Mr. Bhatt to pay his tax amount & accordingly Mr. Bhatt paid the tax of M/s. ABC Ltd. Mr. Bhatt Gets reimbursed From M/s. ABC for the tax paid.
In this case, Mr. Bhatt acts as a pure agent of M/s. ABC Ltd. for the tax amount paid, and this will be regarded as an ancillary service not liable to GST, And the GST would be charged on Rs. 80,000 (Professional fees)
Reimbursement of expenses to employees
It is an expense which an employee pay an expense on behalf of employer and gets reimbursed. In such cases the employee ascts as a pure agent of the employer.
Example- An employee Mr. Rawat paid internet bill of Rs. 4.867 of his company and gets reimbursed from his employer.
In this case, Mr. Rawat acts as a pure agent of his company.
It is an expense incurred during the course of trade.
Example- A Customs Agent Mr. Bisht agreed with Mr Pawar to import some of his goods to India. Mr. Bisht on request of the Importer Mr. Pawar, paid some expenses like custom duty & dock wharehouse charge.
In this case, agency income and travelling charge shall be added for determining the value of supply by the Customs Broker and chargeable to GST as it is the Main service whereas Dock wherehouse charge and the Customs Duty is incurred on request of Mr. Pawar and these expenses was reimbursed to Mr. Bisht.
So, the charges (Customs Duty , wharehouse charge) incurred by the custom broker ( which was reimbursed) was that of a pure agent of the importer and it will be termed as an Ancillary service and not be liable to GST.