Pure Agent Concept Under GST: An agent is an individual who has been commissioned to act or serve on behalf of some other person that any other individual may call a Principal. An agent is obligated to (or under control) the principal and (when operating within the field of authority designated by the principal) binds the principal with individual acts.
Agent business plays a significant role in today’s business world, and this article addressing the pure agent concept under GST.
- Definition of Agent Under GST Act
- Who is a “Pure Agent”?
- Examples of Circumstances That Involves Pure Agent
Definition of Agent Under GST Act
“Agent” under Section 2(5) indicates an individual, including a factor, broker, commission agent, an auctioneer, arhatia, del credere agent, or any other mercantile agent, by whatever designation called, who receipt of goods or services on behalf of another organisation or firm or carries on the business of supply.
As with other business services, services provided by the Agent will also be subject to the GST act and rules, and the GST will apply to the Agent.
The operating mode of business drive by an agent is unconventional from other ordinary businesses. The agent may occupy or engage some of the other services or persons to fulfil their central agency service and, on behalf of the principal, incur the expenses.
So here the inquisition is that the expenses incurred and the services engaged by the agent on behalf of the principal should be incorporated in the taxable value of services or not under the GST act because those sorts of expenses in the nature of restitution since the GST will apply on the compensation of expenses also in general.
The department has provided transparency for the same with the inclusion concept of “Pure agent”. This pure agent concept has been acquired from the erstwhile Service Tax (Determination of Value) Rules, 2006 and conducted forward under GST. As per CGST Rules, 2017, this concept presents clarity about the taxability of the expenses incited by an agent on the principal behalf.
Who is a “Pure Agent”?
Broadly, addressing a pure agent is an individual who, while forming a supply to the recipient, also bears and acquires expenditure on some other supply on account of the recipient and demands reimbursement (as actual, without summing it to the value of its own supply) for such supplies from the recipient of the principal supply.
Pure Agent means somebody who
- infiltrates into a contractual agreement with the beneficiary of supply to act on their behalf and acquire costs or expenditure in the course of supply of goods or services or both;
- neither intends to hold nor holds any claim to the goods or services (or both) obtained on behalf of or contributed to the recipient of supply;
- does not utilise the goods or services so obtained for his own concern, and
- receives only the exact actual amount contracted to procure such goods or services.
The costs or expenditure incurred by the provider of the service as a pure agent of the recipient of service shall be eliminated from the value of the taxable service if all the subsequent conditions are satisfied, namely: –
- the service provider serves as a pure agent of the service recipient and when the person executes payment to a third party for the goods or services procured
- the recipient of service collects and utilises the goods or services so procured by the provider of the service in the person’s capacity as a pure agent of the recipient of service
- the service provider pays the third party after collecting the amount that has been collected from the recipient of the service.
- the goods or services gained by the service provider as a pure agent of the recipient of service from the third party are in addition to the services he provides on the individual’s own account
- the service recipient is entirely liable to arrange payment to the third party
- the service recipient authorises the service provider to make payment on their behalf
- the goods and services for which payment has been made is known by the recipient of service by the service provider shall be provided by the third party
- the service provider to the service recipient issues the invoices on behalf of the service provider for the payment that should be made by the recipient of service also should be separately indicated
Examples of Circumstances That Involves Pure Agent
Here are few examples of circumstances that involves Pure Agent:
Example 1. X contract with Z, an architect, for constructing a house. During the course of giving the taxable service, Z incurs costs such as telephone air travel tickets, hotel accommodation, charges etc., to enable him to implement the provision of services to X effectively. In such a state, in whatever mode Z recovers such expenditure from X, whether as part of an overall inclusive fee or an individually itemised expense, GST is obligatory on the total amount charged by Z. Value of the taxable service for charging GST is what X pays to Z.
Example 2. Corporate services firm X is involved in managing the legal work concerning the incorporation of ComÂpany Y. Other than its fee for the service, X also recovers approval fee and registration fee for the particular company’s name paid to the Registrar, for the Companies from Y. The fees imposed by the Registrar of the company’s registration and approval of the name are compulÂsorily levied on Y.
Example 3. In the course of administering a taxable service, a service provider incites costs such as postage, telephone, travelling expenses, etc., and these items can be individually indicated on the invoice issued to the recipient of service. In such a situation, the service provider is not serving as an agent of the recipient of service but obtains such inputs or input service on his own account for giving the taxable service. Such charges do not become an expenditure that is reimbursable merely because they are indicated separately in the invoice published by the service provider to the recipient of the service.
Example 4. Company X for overseas visitors provides a taxable service of rent-a-cab by rendering chauffeur driven cars. The chauffeur is provided with a lump sum amount to cover his food and overnight accommodation and any extra incidental expenses such as parking fees by Company X during the tour. At the completion of the tour, the chauffeur returns the balance of the amount with a record of his expenses and the associated bills. Company X imposes these amounts on the recipients of service. The payment incurred by the chauffeur and billed to the recipient of service aggregates part of the gross amount charged for the prerequisite of services by company X.
Example 5. Let us say a person name A contracts with B, a real estate agent, to auction his house, and immediately, B presents an advertisement on television. B billed A, including costs for Television advertisement and the service tax paid on the cumulative recompense billed. In such a situation, consideration for the provided service is what A funds to B. B does not operate as an agent on behalf of A when concerning the television advertisement even if the expense of television advertisement is designated distinctly in the invoice issued by A. Advertising service for the estate agent is an input service to enable or facilitate him to perform his assistance as an estate agent.