pure agent problem gst, Goods and Services Tax - GST

[indranil basu]

There is a matter of Auto Rickshaw Dealer ,their sales bills as follows SELLING TO REGISTERED BUYER

Auto Rickshaw 120000

Insurance 20000

Registration at Rto 10000

GST rate is 12 %

Current billing process

Auto Rickshaw 120000

GST 14400

Insurance 20000

Registration at Rto 10000

TOTAL INVOICE VALUE 164400

ABOVE CONCEPT BASED ON PURE AGENT OF (WE HAVE AGREEMENT FOR PURE AGENT MATTER ) RULE 33

Insurance 20000

Registration at Rto 10000

PROBLEMS WE ARE FACING CURRENTLY

IN GSTR 1 WE WRITE AS FOLLOWS

TAXABLE VALUE 120000

GST 14400

INVOICE VALUE 164400(120000+14400+20000+10000)

NOW DEPARTMENT IS ASKING FOR REVERSAL OF EXEMPT SUPPLY FOR 30000 AS FOLLOWS

Insurance 20000

Registration at Rto 10000

ON OTHER SIDE THE BUYER IS FACING THE BELOW PROBLEM

THE BUYER IN HIS GSTR 2A HAVING TWO BILLS

OUR BILL RS 164400

AND INSURANCE COMPANY BILL 19000(TAXABLE VALUE ) +1000(GST) = 20000 SHOWING

NOW IN REGISTERED BUYER GSTR 3B

ONE INPUT RS 14400+1000 (INSURANCE)

AND INWARDS NIL RATED SUPPLY 30000

SUGGESTION WE RECEIVED TO BILL CUSTOMER

Auto Rickshaw 120000

GST 14400

AND THE FOLLOWING AS REIMBURSEMENT EXPENSES

Insurance 20000

Registration at Rto 10000

BUT IN THE SUGGESTION THE PROBLEM IS THAT - THE BANK FINANCE IS CURRENTLY GOING ON 164400 BUT IF WE TAKE THE SUGGESTION THE BANK FINANCE WILL BE 134400 BECAUSE BANK MANAGER IS CONSIDERING THE INVOICE VALUE

PLEASE GIVE ME THE SUGGESTION ,WE MUST HAVE TO SHOW INVOICE 164400 FOR FINANCE

Regards,

INDRANIL BASU

Contact no. +91 7003556438

[email protected]

Posts / Replies

[KASTURI SETHI]

Dear Querist,

Query-wise reply is as under:-

(i) No reversal of ITC is required as such exclusions do not fall under the definition of 'Exempt supply'. When we talk of determination of value of supply of services in the case of pure agent, exclusions do not imply exemption. It is a method of valuation. See the definition of 'exempt supply' under Section 2(47) of CGST Act

(ii) You have used the wrong word, 'Reimbursement' in place of 'DISBURSEMENT'. Disbursement is not subject to GST. There is a world of difference between these two words. Disbursement cannot form the part of taxable value whereas reimbursement can form the part of assessable value. See the legal meaning of both words.. You have correctly shown these amounts separately in the invoice.

(iii) Under GST law, taxable value is the transaction value i.e. price actually paid or payable, provided the supplier & the recipient are not related, and price is the sole consideration. In most of the cases of regular normal trade, the invoice value will be the taxable value. However, to determine value of certain specific transactions, Determination of Value of Supply rules have been prescribed in CGST Rules, 2017. Compulsory Inclusions Any taxes, fees, charges levied under any law other than GST. (This is an extract from an article published by Board.).

(iv) Furthermore, are you sure that you are a pure agent ? Do you conform to the parameters laid down in Rule 33 of CGST Rules, 2017 read with Board's Pure Agent Concept in GST.

Best examples of Pure Agent are, 'C & F' Agent, Travel Agent, CHA etc. Also Go through the following Board's circulars:-

C.B.E. & C. Flyer No. 26, dated 1-1-2018

Introduction

The GST Act defines an Agent as a person including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

So, who is a pure agent and why is a pure agent relevant under GST? Broadly, speaking a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply. While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent.

Let’s understand the concept by taking an example. A is an importer and B is a Custom Broker. A approaches B for customs clearance work-in respect of an import consignment. The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter. So A, also authorises B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals. In the given illustration, B is providing Customs Brokers service to A, which would be on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form part of value of Customs Broker service provided by B to A. This, in sum and substance is the relevance of the pure agent concept in GST.

Relevance of pure agent under GST

The concept is borrowed from the erstwhile Service Tax Determination of Value Rules, 2006 and carried forward under GST. Under the GST Valuation Rules, 2017 pure agent is given the following meaning.

“pure agent” means a person who -

(a) 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;

(b) 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;

(c) does not use for his own interest such goods or services so procured; and

(d) 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.

The important thing to note is that a pure agent does not use the goods or services so procured for his own interest and this fact has to be determined from the terms of the contract. In the illustration of importer and Customs Broker given above, assuming that the contract was for clearance of goods and delivery to the importer at the price agreed upon in the contract. In such case, the Customs Broker would be using the transport service for his own interest (as the agreement requires him to deliver the goods at the importers place) and thus would not be considered as a pure agent for the services of transport procured.

Another important fact is that, the person who provides any service as a pure agent receives only the actual amount for the services provided. Coming back to our example of Importer and Customs Broker, the agreement provides reimbursement of transport services utilised at actuals. In this case, let’s say the value of transport service was ₹ 10,000/-. If the Customs Broker charges any amount more than ₹ 10,000/-, then he will not be considered as a pure agent for the services of transport and the value of transport service will be included in the value of his Customs Broker service.

Exclusion from value

Expenditure incurred as pure agent becomes relevant, when it comes to determining the value of a supply for levy of GST. The preceding para explains who will be considered as a pure agent. The valuation rules provide that expenditure incurred as pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusion of expenditure incurred as pure agent is possible only and only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case.

The supplier would have to satisfy the following conditions (in addition to the condition required to be satisfied to be considered as a pure agent) for exclusion from value as under :-

i. the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party on authorization by such recipient;

ii. the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

iii. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

In case the conditions are not satisfied, such expenditure incurred shall be included in the value of supply under GST.

The following illustration will make the concept clearer.

• Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B.
• Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies.
• The fees charged by the Registrar of the companies, registration and approval of the name are compulsorily levied on B.
• A is merely acting as a pure agent in the payment of those fees.
• Therefore, As recovery of such expenses is a reimbursement and not part of the value of supply made by A to B.

Some examples of pure agent are

1. Port fees, Port charges, Custom duty, dock dues, transport charges, etc. paid by Customs Broker on behalf of owner of goods.

2. Expenses incurred by C& F agent and reimbursed by principal such as freight, godown charges.

Illustration :

Suppose a Customs Broker issues an invoice for reimbursement of a few expenses and for consideration towards agency service rendered to an importer. The amounts charged by the Customs Broker are as below :

S. No.	Component charged in invoice	Amount
1	Agency Income	₹ 10,000/-
2	Traveling expenses; Hotel expenses	₹ 15,000/-
3	Customs Duty	₹ 55,000/-
4	Docks Dues	₹ 5000/-

In the above situation, agency income and travelling/hotel expenses shall be added for determining the value of supply by the Customs Broker whereas Docks dues and the Customs Duty shall not be added to the value provided the conditions of pure agent are satisfied.

Conclusion

A pure agent concept is an important one for businesses as it has direct implications on the value of taxable service. It has direct bearing on the amount of GST charged on a particular supply. It also has bearing on the aggregate turnover of the supplier and therefore on calculating the threshold limit for registration. Whenever the intention is to act as a pure agent, care should be taken to ensure that the conditions specified for such pure agents and further conditions given in the valuation rules are also met so that only the real value of the service provided is subjected to GST.

Relevant extract of C.B.E. & C. Flyer No. 29, dated 1-1-2018

Value of supply of services in case of a Pure Agent

Subject to fulfilment of certain conditions, the expenditure and costs incurred by the supplier as a pure agent of the recipient of supply of service has to be excluded from the value of supply.

Illustration

Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies. The fees charged by the Registrar of the companies registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, As recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

Hope you will be able to arrive at some conclusion.

[Ganeshan Kalyani]

Sri Kasturi Sir has given a detailed write up which must resolve the query of the querist . In summary have understood that if the registration fees are to be borne by the buyer and the buyer has given you the authority to pay on their behalf and you do not claim anything more that what is actually paid to the government for registration then it would qualify for pure agent benefit. You have to analyse and take a call. Please be mindful that benefit taken on account of pure agent went mostly into scrutiny. Hence, take care before implementing. You may see support of the expert in this forum who posses rich experience in taxation and would charge nominal fees. Thanks.

[DR.MARIAPPAN GOVINDARAJAN]

Wow! What a detailed reply by Shri Sethi

[KASTURI SETHI]

Dr.Govindarajan Sir,

Thanks for your compliments.

[Anshul Gour]

MY QUERY ON THIS TOPIC IS THAT WHAT WILL BE THE TOTAL INVOICE VALUE IN GSTR-1. will it include expenses incurred as pure agent or not?? please clarify how we upload invoice in GSTR-1 on which we saparately indicated expenses incurred as a pure agent by taking above auto rikshaw billing process example? please suggest.

[KASTURI SETHI]

With reference to query at serial no.5 dated 28.2.20, my views are as under :-

(1) Firstly you must be in the know of the difference between the words, 'Reimbursement' and 'Disbursement'. It is very important to understand the concept of pure agent.

(2) Secondly, you are to ensure whether you qualify as pure agent. Peruse the definition of 'pure agent' under Rule 33 along with 29 of CGST Rules, 2017.

In the given example of billing by auto rickshaw dealer, the service receiver or buyer is liable to bear the expenses on account of insurance and registration fee and the dealer pays to the concerned department from his pocket for and on behalf of the buyer and, thereafter, recovers that very amount from the buyer. The dealer gets the same amount whatever he has spent and not more than that, even one rupee. If the dealer recovers more than he spent, the dealer will be out of definition of pure agent as defined in Rule 33 of CGST Rules. In the case of pure agent, both these expenses are to be excluded from the taxable value to arrive at correct amount of tax..

Further, invoice value (total) and taxable value both are to be shown in GSTR-1 return.