Globalisation has increased the transaction of various kinds of businesses around the world. Often, enterprises or purchasers choose to avail of products and related services from diverse suppliers. In some business transactions, the suppliers deliver an excess of products and related services in the interests of their clients. In simple words, this implies that the supplier spends more money to deliver the excess goods. So, now the question is whether the supplier is liable for GST paid on the excess of goods or not.
There are two distinct types of expenses under question.
- Incidental expenses include travel costs, packaging, or even commission, and these expenses are borne before the actual delivery or, sometimes, at the time of delivery.
- The second type involves expenses where suppliers bear registration costs, government taxes or transport services suggested by the clients. In such cases, suppliers are termed as pure agents.
Pure agents are individuals bound by a contract to bear expenses on behalf of the recipients. They do not have to use these products for their benefit, receive the exact amount paid by the recipients, and cannot hold title to these goods.
Let us understand how GST on reimbursement of expenses is calculated and how GST is calculated based on value addition (and not the value of the products and related services.)
Did you know? As a federal country, India has a dual GST structure, the Central Goods and Service Tax (CGST) and the State Goods and Service Tax (SGST). Canada is the only other country with a dual tax structure.
Everything About the Application of GST on Reimbursement of Expenses
The four types of GST Acts in India include:
- Integrated Goods and Service Tax – IGST
- Central Goods and Services Tax – CGST
- State Goods and Services Tax – SGST
- Union Territory Goods and Services Tax – UTGST
GST enables the smooth flow of credit across the supply chain, and it eases the burden of inflation caused by cascading taxes.
The Central Goods and Services Acts of 2017 includes Section 15, which states that the transaction value is the value of a supply of goods and services. Transaction value implies the price paid for the supply of the goods or the service, and the price is the key consideration in such a transaction.
Here, it is important to understand how indirect taxes are calculated on a global platform or global transaction. It involves three methods:
- Specific duty
- Ad-valorem tax
- Value-added tax (VAT)
GST is always calculated based on value-added and not the value of the products and services. In simple words, it means the value added to the materials or inputs purchased by the supplier or producer, and it does not include the cost of such input. The value addition is calculated per Section 15 of the CGST Act of 2017. Section 33 of the CGST Act states that expenses that pure agents bear will not be considered as a part of the supply chain costs but under specific conditions.
Given below are the conditions:
- Pure agents of recipients make payments to third party personnel only if they have been asked to by the recipients
- All payments which Pure agents make on behalf of the beneficiaries are clearly stated on a separate invoice, and pure agents issue these to the beneficiaries.
- Whatever deliverables are acquired by the third party by the Pure agents are outside the suppliers' services to the beneficiaries.
The above conditions have to be met by the supplier. If they are not, then the expenses under GST, as explained above, will be considered in the value of the supply chain under the GST rules.
Is GST applicable on reimbursement of expenses?
Suppose A is an importer, and B is a customs broker. B is responsible for all custom clearance procedures on behalf of A regarding import consignment. This customs clearance would require a transport service, and A has asked B to hire the transport and make the necessary payment. In this scenario, all the services B provides in terms of custom clearances are per rules of the GST Act. However, B's services to A are based as a Pure Agent, and A will have to reimburse B. Reimbursement falls under the purview of Section 33 of the CGST Act.
It is always advisable to have:
- A written contract between the Suppliers and beneficiaries
- Clearly stated terms and conditions regarding the Pure agent
- Invoice proof to validate that the Dealer or Supplier had to bear the costs for the sake of convenience, but the payment liability rests on the beneficiary.
- Services offered by the Pure Agent should be clearly stated in the issued invoices even though GST is not applicable.
The SAC code must be 9997 – this provides for various other services like dyeing, cleaning, physical well-being, washing, and numerous miscellaneous services which are not necessarily classified.
What are the SAC and HSN Codes?
SAC Code in GST
- It is a six-digit number, e.g. 996335
- The first two digits of 99 are always the same.
- The two digits following 99, i.e. 63, are of a specific service. Here it refers to catering services
- The last two digits specify the nature of the services – this could be across trains, flights etc.
- SAC codes are important because they help understand the GST rates applicable to their specific service. These have to be mentioned in the GST registration and the GST invoice, and they help you identify services from among the many available.
HSN code in GST
HSN codes help classify goods from across the globe in the most organised manner. These are used by more than 200 countries and help facilitate the smooth functioning of international trade when it comes to GST. More than 98% of international trade goods are classified in these codes. This code includes two more digits for a more acute classification of the good in India. A typical example of an HSN code is 22.214.171.124.
The details of this article would have surely helped you understand the reimbursement of expenses under GST. It also gives you an insight into identifying Pure Agents, their roles and responsibilities. The article also provides a clear understanding of the SAC and HSN codes and their application to goods and services on a national and international platform. Do you have issues with payment management and GST? Install the Khatabook app, a friend-in-need and one-stop solution for all issues related to income-tax or GST filing, employee management and more. Try it today!