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Reimbursement of expenses takes place when a supplier incurs expenditure on behalf of the recipient of supplies. This article discusses the reimbursement of costs to a supplier and the impact of Goods and Services Tax (GST).
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.
There are two types of expenses that may get reimbursed to the supplier under GST:
The following section explains the pure agent concept under GST in detail.
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-
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.
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 until 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:
If these conditions are not satisfied, then such expenditure incurred will be included in the value of supply under GST.