GST on Commission and Brokerage

GST on commission and brokerage applies to the earnings of intermediaries involved in facilitating purchase and sales transactions. These services are subject to GST in India. In this article, we explore the applicability of GST on commission and GST on brokerage services and examine how to claim input tax credits. It is important to note that GST registration applies to all commission and brokerage income irrespective of the turnover limits of the taxpayer. 

Who is a Broker and Commission Agent Under GST?

An agent is defined under the GST law as a person who carries on the business of supply of goods or services on behalf of another person (principal). An agent includes a broker, commission agent, factor, auctioneer, or a mercantile agent. He carries out activities under the principal-agent relationship.

Applicability of GST for Brokers and Commission Agents

As per Section 7 of the CGST Act read with the Schedule I, ‘Supply of goods, by a principal to his agent or by an agent to his principal, where the agent supplies such goods on behalf of the principal’ is chargeable to GST even if made without consideration, but for conducting business.

The definition of an agent, as discussed above, includes ‘supply or receipt of goods on behalf of the principal’. Thus, a principal-agent relationship is an essential factor for determining whether a transaction is covered under the definition of an agent. 

For this, it is essential to understand whether the agent is carrying out the activity as a representative, i.e. ‘supplying or receiving the goods on behalf of the principal.’ The key criteria for determining the existence of a principal-agent relationship is ‘how an invoice is raised?’.

• If an invoice is raised in his name (agent’s name) – It would be covered under Schedule I transactions and thus liable to GST.
• If an invoice is raised in the name of principal – Not covered under Schedule I.

Here, the important point is whether the agent has the authority to pass/receive the title of goods on behalf of the principal. Let us understand better with the help of the following scenarios.

Scenario 1

Mr X appoints Mr Y to purchase certain goods. Here, Mr Y identifies Mr Z as a supplier and asks him to supply the goods to Mr X by raising an invoice on Mr X. Thus, Mr Y is not involved anywhere, and so he does not fall under the definition of an agent as per Schedule I.

But, in a similar situation, if Mr Y obtains the delivery of goods from Mr Z on behalf of Mr X where Mr Z raises the invoice on Mr Y, then such a transaction is covered under the definition of agent and is a supply under Schedule I.

Scenario 2

Mr A is an auctioneer appointed by M/s ABC to auction certain goods. Mr A identifies a few potential buyers and carries out the auction process. Here, M/s ABC issues goods to the highest bidder by raising an invoice in the name of the bidder. Thus, Mr A is nowhere involved in the supply of goods, and so he does not fall under the definition of supply as per Schedule I.

In a similar situation, Mr A issues the goods on behalf of M/S ABC to the highest bidder and also raises the invoice in his name (i.e. Mr A). Here, Mr A is not only providing auctioneering services but also has an authority to transfer the title of goods on behalf of M/s ABC and thus, this transaction is covered under the definition of supply as per Schedule I.

Comparison of taxes before and after GST

Let us understand how a commission agent was charged to tax earlier under the Service tax regime and now under GST with the help of an example.

Consider Mr A; a commission agent charges Rs.5,000 as his service charge within India.

Thus, the introduction of GST has increased the tax burden on brokers and commission agents.

GST Registration for Brokers and Commission Agents

Any person who falls under the definition of an agent is required to obtain GST registration. The threshold limit for registration does not apply to commission agents. Hence, a person is required to obtain compulsory registration once they fall under the definition of an agent as mentioned above. They can register himself as an NRTP (Non-Resident Taxable person) if they are making a taxable supply in India and have no fixed place of business or residence in India.

The composition scheme was earlier available only for the suppliers of goods, but the scheme is now available for service providers as well as vide CGST (Rate) notification no. 2/2019 dated 7th March 2019. Thus, brokers and commission agents with an annual aggregate turnover of up to Rs.50 lakh can opt for composition schemes. Opting for composition schemes will reduce the compliance burden of small taxpayers.

However, if an Indian exporter pays a commission to an FCA (foreign commission agent), he is not liable to pay GST as the place of supply is out of India and reverse charge does not apply to Indian exporters.

Invoicing Requirements for Brokers and Commission Agents

Basic requirements: An agent is required to issue a tax invoice for the supply of its services. In the case of exempt supplies, he can issue a Bill of Supply. Further, the SAC code should be mentioned on the tax invoice as per the turnover limits:

• Up to Rs 5 crore – Mandatory for B2B tax invoices – Four digits
• Up to Rs 5 crore – Optional for B2C tax invoices – Four digits
• Greater than Rs 5 crore – Mandatory for B2B tax invoices – Six digits

e-Way Bill Requirements: A pure agent is required to generate e-way bills if he is also working as a transporter, and the consignor/consignee does not generate the e-way invoice.

e-Invoicing Requirement: If the agent is earning more than the threshold limit notified, as annual turnover in any FY from FY 2017-18, then he/she must comply with the e-invoicing system. 

What is the Value of Supply for Brokers and Commission Agents?

The value for the calculation of GST for an agent is different for each of the below cases:

As Sole Agent (Rule 29): In case of supply made as a sole agent, the value of supply shall be:

• The open market value of goods supplied
• 90% of the price charged for the supply of goods of a similar kind by the recipient to his customer (not being a related person) where the goods are intended for further supply by the recipient;

As a Pure Agent (Rule 33): A pure agent is one who makes a supply to the recipient and also incurs expenditure on behalf of the recipient for other ancillary services and claims reimbursement of the same without adding it to the value of his supply. Here, the relationship between the service provider and service recipient is on a principal to principal basis. But, for ancillary services, it is that of a pure agent. As per the Valuation Rules of GST, expenditure incurred as a pure agent will be excluded from the value of supply.

GST Rates for Commission Agents and Brokers

GST at 18% is applicable on the taxable value of supply provided by a commission agent or broker, including the sale/purchase of advertising space/time. Following are some of the services provided for a fee/commission or on a contract basis:

• Sale of land/building.
• Any retail/wholesale trade service.
• Property management service.
• Real estate appraisal service.
• Commission agent services to negotiate wholesale commercial transactions.

Usually, a supplier of goods/services is required to pay GST. But, in some cases, a recipient of goods/services is required to pay GST called a reverse charge mechanism. Services provided by a broker or a commission agent to the following individuals are covered under reverse charge mechanism:

• Banks
• Financial institutions

Can Input Tax Credit be Claimed by Commission Agents and Brokers?

Yes, input tax credit (ITC) can be claimed by commission agents and brokers on the GST paid on the inputs and input services used by them to render their output services. This includes expenses such as office overheads, office supplies, etc.

Can ITC be Claimed on Commission?

Yes, ITC can be claimed on commission paid to agents if the commission is incurred for business purposes and all the conditions and requirements under the GST law are met. 

GST Exemptions for Brokerage and Commission

The following services provided for commission are exempt under GST:

• Services by fair price shops:
  • To the Central Government on sale of rice, wheat, and other coarse grains.
  • To the state government or Union Territories on sale of kerosene, sugar, edible oil, etc.
• Support services to agriculture, forestry, fishing, and animal husbandry.
• Services under cultivation of plants and rearing of all life stock (except horse), such as:
  • Direct agricultural operations
  • Farm labour supply services
  • Certain agricultural processes like tending, pruning, cutting, harvesting, drying, sun drying, etc.
  • Renting/leasing of agro machinery or a vacant land
  • Warehousing and storage activities of agricultural produce
  • Extended agricultural service
  • Services provided by an Agricultural Produce Marketing Committee

Liability of Principal and Agent under GST

In the case where an agent supplies goods on behalf of his principal, then both principal and agent are jointly and severally liable to pay GST on such taxable goods. For example, if M/s X appoints Mr Y as an agent to sell its goods. Mr Y sells such goods to Mr Z on behalf of M/s X. In this case, M/s X and Mr Y are jointly and severally liable to pay GST on such goods, if either of them fails.

GST Compliance for Brokers and Commission Agents

Forms and Returns: A registered broker and a commission agent are required to file the below returns:

• GSTR-3B – Monthly summary return.
• GSTR-1 – Return for reporting outward supplies.
• GSTR-9 – Annual return.
• GSTR-5 and GSTR-5A – Non-resident foreign taxpayers.

Maintenance of Accounts: All agents are required to maintain accounts showing the particulars of:

• Authorisation from principal to supply/receive goods on his behalf.
• Quantity and value of goods/services received on behalf of the principal.
• Details of accounts furnished to the principal.
• Taxes paid on supply/receipt of goods/services on behalf of the principal.

Read more: Impact of GST on Rent: GST on House Rent and Commercial Property Rent

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