The repayment of money spent by a person is referred to as reimbursement of expenses. This frequently occurs in business transactions when a supplier incurs expenses on behalf of the recipient who is meant to incur the expenses. In most cases, tax is only applied to the profit margin, not to any reimbursement amount (cost or expense) that we pay on behalf of the recipient to complete the main task. But it’s not as straightforward as it appears.
GST is a tax levied on the value of taxable supplies received or to be received for the supply of goods, services, or both, except the value of pure agent services. A pure agent is a supplier who makes a supply to a receiver and then incurs expenditure on behalf of the recipient on another linked supply for which they seek reimbursement under GST. The supplier is seeking payment for the actual costs expended; no value is added to the original worth of the supplier’s supply.
Expenditure That Might Be Reimbursed To The Supplier Under GST
Under the GST, the supplier may be compensated for two types of expenses:
Expenses incurred by the supplier during the supply process. This can take the shape of commission, packing, travel expenditures, and other costs that are included in the supply value. These costs are frequently incurred before or during the delivery of goods or the provision of services.
Expenses incurred by the supplier as a pure agent. These are costs incurred by the provider on behalf of the recipient that is not included in the supply value. Registration or tax payments to the government, transportation charges paid to a third-party transporter that the recipient has authorised the provider to incur, and so on are examples.
Who qualifies as a GST pure agent?
A principle to principal relationship exists between the provider and the recipient for the main supply made. The relationship between the supplier and the recipient of the auxiliary supply made, on the other hand, is that of a pure agent.
The concept of a pure agent is explained as follows in Rule 33 of the Central Goods and Services Tax Rules. A pure agent is a person who possesses the following qualities:
Agrees to incur expenses on behalf of the recipient of supply as their only agent during the supply of products or services, or both.
As a pure agent of the recipient of the supply, does not hold or plan to hold any claim to the goods or services, or both, that have been procured or given.
Does not make use of products or services obtained for his benefit.
Purchase from a Registered Dealer – Employee Reimbursement
A GST-registered provider is known as a registered dealer. GST is not applied to money reimbursed by an employer to an employee for expenses incurred on behalf of the employer in the form of purchases from a registered dealer. For a transaction to be exempt from GST, it must meet the following criteria:
The expenses incurred are for the benefit of the employer’s business.
Employees incur expenses in the course of or in connection with their employment, and the employer reimburses them.
On such services, the supplier has produced a tax invoice and charged GST. The name and GSTIN of the employer as receiver appear on the tax invoice.
If all of the aforementioned conditions are met, the employer will be eligible for the GST paid by the employee’s Input Tax Credit (ITC).
A supplier who does not have a GST registration is known as an unregistered dealer. The supplier would not have levied GST on the supply of goods or services in such circumstances. Expenses expended by an employee in the course of or in relation to work, and reimbursement of such expense by the employer, will not be subject to GST, even if purchased from unregistered dealers.
However, when services are delivered to an employee by an unregistered dealer (who is just receiving the service on behalf of the employer), the requirements of the reverse charge mechanism will apply.
What effect does GST have on expenditure reimbursement?
Except when incurred as a pure agent, all reimbursements of expenses must be included in the value of the supply. To break it down further:
The value of a supply of goods or services, or both, is the transaction value, according to Section 15 of the CGST Act. When the supplier and the recipient are not related and the price is the sole consideration for the supply, this is the price paid or payable for the supply of these goods or services.
Any incidental charges charged by the supplier to the recipient, as well as any other sum charged for anything done during the supply until the time of delivery of the goods or supply of the services, are included in the value of the supply, according to Section 15(2) clause (c). As a result, any goods or services delivered by the supplier for which the recipient pays a fee are included in the transaction value and taxed.
In terms of reimbursement for expenses incurred as a pure agent, Rule 33 of the CGST valuation regulations states that any expenses incurred as a pure agency are removed from the value of supply, and hence from the total turnover.
According to GST law, the value of services supplied includes “reimbursement of expenses.” In other words, if any consideration is received as reimbursement from the customer, GST liability will be attracted and charged on the service provider’s invoice. However, reimbursement of expenses is exempt in one case, that of a pure agent. Wherein the law specifies the amount of expenditure or costs incurred as a pure agent by a supplier acting solely as a representative of the recipient of supply shall be deducted from the value of supply depending on the circumstances.
As a result, unless the reimbursement is like pure agency, GST is applicable on reimbursement of expenses.
CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system.
His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.
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