GST on Reimbursement of Expenses to a Supplier

Reimbursement of expenses takes place when a supplier incurs expenditure on behalf of the recipient of supplies. This article discusses the reimbursement of expenses to a supplier and whether GST is applicable on the same.

What does reimbursement of expenses mean?

Reimbursement of expenses refers to the repayment of money spent by a person. In business transactions, this usually happens when a supplier incurs expenditure on behalf of the recipient who is supposed to incur the said expenditure.

The nature of such reimbursements to a supplier is generally of two types, which we will discuss in the next section.

Type of reimbursement of expenses

There are two types of expenses that may be reimbursed to the supplier under GST:

1. Incidental expenses incurred by the supplier in the course of supply. This may be in the form of commission, packing, travelling expenses, etc., and forms a part of the value of supply. These expenses are usually incurred before or at the time of delivery of the goods or supply of the services.
2. Expenses that the supplier incurs as a pure agent. These are expenses that the supplier has incurred on behalf of the recipient but do not form a part of the value of supply. Examples include registration fees or taxes paid to the government, transportation charges paid to a third-party transporter that the recipient has authorised the supplier to incur, etc. 

The following section explains the concept of a pure agent under GST in detail.

Who is a pure agent under GST?

Under GST, a pure agent refers to a supplier who makes a supply to a recipient and incurs expenditure on some other related supply on behalf of the recipient for which they claim a reimbursement. The reimbursement sought by the supplier is at the actual cost incurred, and no value is added to the original value of the supply made by the supplier.

The relationship between the supplier and the recipient for the main supply made is that of a principal to principal basis. On the other hand, the relationship between the supplier and the recipient for the ancillary supply made is that of a pure agent.

Rule 33 of the Central Goods and Services Tax Rules explains the concept of a pure agent as follows. A pure agent is a person who-

• Enters into a contractual agreement with the recipient of supply as their pure agent to incur expenditure during the supply of goods or services or both.
• Does not hold nor intend to hold any title to the goods or services or both that have been procured or provided as a pure agent of the recipient of the supply. 
• Does not use such goods or services procured for their own interest.
• Receives only the actual amount incurred to procure such goods or services, besides the amount received for the supply provided on the supplier’s own account.

Examples of a pure agent under GST

Example 1: X, a Chartered Accountant, collects Rs.1,00,000 from their client ABC Ltd. as professional fees for services rendered for the financial year 2020-21. In addition to this, X also collects Rs.45,000 as a reimbursement for income tax paid to the government on behalf of ABC Ltd. While the first amount of Rs.1,00,000 collected is on a principal to principal basis, the second amount of Rs.45,000 is collected from the client as a pure agent.

Example 2: Y is an importer, and Z is a customs broker. Z takes on the task of customs clearance on behalf of Y in respect of an import consignment. This customs clearance work also required the services of a transporter, for which Y has authorised Z to hire the transporter and make the payment on their behalf. Hence, the services of customs clearance provided by Z are on a principal to principal basis. The transportation services, on the other hand, which was procured by Z and reimbursed by Y, is on a pure agent basis.

Applicability of GST on the reimbursement of expenses

All reimbursements of expenses shall form a part of the value of supply, except when incurred as a pure agent. To break this down-

Section 15 of the CGST Act provides that the value of a supply of goods or services or both shall be the transaction value. This is the price paid or payable for the supply of these goods or services and applies where the supplier and the recipient are not related, and the price is the sole consideration for the supply.

Section 15(2) clause (c) states that any incidental expenses charged by the supplier to the recipient and any other amount charged for anything done during the supply up to the time of delivery of the goods or supply of the services shall be included in the value of the supply. Hence, any goods or services provided by the supplier, for which a consideration is charged from the recipient, shall be included in the transaction value and chargeable to tax.

With regard to reimbursement of expenses incurred as a pure agent, Rule 33 of the CGST valuation rules provides that any expenditure incurred as a pure agent will be excluded from the value of supply, and hence, from the aggregate turnover as well. However, the supplier will need to satisfy the following conditions for the exclusion from the value of supply: 

• The supplier acts as a pure agent of the recipient when they make a payment to a third party after authorisation by such recipient.
• The payment that the pure agent made on behalf of the recipient is indicated separately on the invoice issued by the pure agent to the recipient. 
• The supplies procured by the pure agent are in addition to the services they supply on their own account.

If these conditions are not satisfied, then such expenditure incurred will be included in the value of supply under GST, and GST will apply on the same.