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All about the GST on Reimbursement of expenses
- The issue of whether reimbursement of expenses provided by service receiver are to be included in the value of taxable service for purposes of charging service tax was also the subject of much litigation under the service tax regime, wherein the Hon'ble SC resolved the controversy regarding whether reimbursement expenses provided by service receiver are to be included in the value of taxable service for purposes of charging service tax in a landmark judgement held under Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd.
- Supreme Court maintained the Delhi High Court's verdict, ruling that reimbursement expenses are not included in the 'gross amount charged' for calculating the value of taxable services subject to service tax.
- Furthermore, by holding that Rule 5 of the Service Tax (Determination of Value) Rules 2006 is ultra vires to Sections 66 and 67 of the Finance Act, 1994, the Hon'ble court has once again reinforced the well-established principle that rules cannot go beyond statute.
- In light of the above judgement, the government amended section 67 of the Finance Act of 1994 (Service tax law) relating to valuation on the 14th of May 2015 to include reimbursement of expenses in and as consideration. The amendment stated that the consideration for taxable services must include all reimbursable expenditures or costs incurred and charged by the service provider.
GST Applicability on Expense Reimbursement
- According to Section 15 of the CGST Act the value of a supply of goods or services, or both, is the transaction value, When the seller and the recipient are not related and price is the sole consideration for 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 products or supply of services, are included in the value of the supply, according to Section 15(2)(c). As a result, any goods or services given by the supplier for which the recipient is charged a fee must be included in the transaction value and taxable.
- Section 15 of the CGST Act, 2017 deals with valuation under the GST regime, but it does not expressly state that value include reimbursements, as it did under Section 67 of the Finance Act, 1994.
- The contours of Section 15 of the CGST Act, 2017, dealing with the value of taxable supply, have been kept wide enough to encompass any amount charged for anything done by the supplier in relation to the provision of goods or services.
- According to Section 15(2) of the CGST Act, 2017, which covers amounts to be included in the value of supplies, among other things, factors are required (b) and (c) that include the following:
Any amount that the supplier is liable to pay in relation to such supply but has been borne by the recipient of supply and is not included in the price actually paid or due for goods or services or both;
Incidental expenses, including commission & packing, charged by supplier to recipient of a supply & any amount charged for anything done by supplier in respect of supply of services or goods or both at the time of or before delivery of supply of services or goods.
- Definition of the term consideration Section 2(31) of the CGST Act, 2017, is similarly wide, covering, among other items, any payments, whether in money or otherwise, made in connection with, in reaction to, or to induce the supply of goods or services.
- In view of the aforementioned legal position, and the fact that GST is not an income tax but rather a tax on gross transaction value, reimbursement of expenses cannot be deducted from the value of taxable supplies unless they are claimed as pure agent.
In matter of M/s Goodwill Auto’s Hon’ble Karnataka advance ruling authority has passed an order (KAR ADRG 44/2021 dated 30.07.2021):
As a conclusion, in the above instance, the diesel reimbursement must be included in the rental value of the DG Set, as reimbursement is regarded an integral part of providing the DG Set rental service.
Reimbursements of expenses as pure agent not taxable under Goods and Services Tax Act
- Reimbursements will be included in the value of the supply, But expenses of reimbursements claimed as pure agent will not be included in value of supply.
- As a consequence, any sum charged as a pure agent will be excluded from the value of the taxable supply for GST purposes.
- To look at it another way, the reimbursement of expenses claimed as a pure agent will be GST-free.
Tax planning tips on Reimbursements of expenses
1. To avoid taxation litigation on expenses reimbursement for Goods and Services Tax, it is recommended that we collect invoices in respect of reimbursable expenditure in the name of the eventual receiver, and only the real cost incurred is claimed as reimbursement without any markup. This will assist us in meeting the condition of not having title to the services/goods and receiving the actual amount.
2. A separate contract for incurring expenses as a pure agent may be entered, as well as separate invoices for principal supply and repayment of costs or expenses.
3. The pure agent's criteria must be met in their fulfilled. To avoid litigation, it is preferable to impose Goods and Services Tax on reimbursements if any condition is not satisfied.
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