Concept of Pure Agent under GST

An agent is a person who has been authorised to act or represent on behalf of some other person, that some other person may called as Principal.

An agent is under the control (is obligated to) the principal, and (when acting within the scope of authority delegated by the principal) binds the principal with his or her acts.

Agent business is playing crucial role in today`s business world and this article discussing about the pure agent concept under GST.

Agent definition under GST Act:

Section 2(5): "agent” means 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.

As like other business services the GST will applicable on the Agent services also subject to GST act and rules. The operating mode of agent business is different from other normal business, the agent may engage or occupy some of the other services or persons to fulfill his main agency service and incur of the expenses on behalf of the principal.

So the here the question is that the services engaged and the expenses incurred by the agent on behalf of the principal should be include in the taxable value of services or not under the GST act, because those kind of expenses in the nature of reimbursement, since the GST will apply on the reimbursement of expenses also in general.

The department has given the clarity for the same with the concept of "Pure agent" this  pure agent concept is borrowed from the erstwhile Service Tax (Determination of Value) Rules, 2006 and carried forward under GST. As per CGST Rules, 2017 and this concept giving the clarity about the taxability of the expenses which incurred by an agent on behalf of principal.  

Who is "Pure agent"

1. 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
2. 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
3. Does not use for his own interest such goods or ser­vices so procured
4. 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 expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-

1. the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured
2. the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service
3. the recipient of service is liable to make payment to the third party
4.  the recipient of service authorises the service provider to make payment on his behalf
5. the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party
6.  the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service
7.  the service provider recovers from the recipient of service only such amount as has been paid by him to the third party
8.  the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account

Example 1. 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.

Example 2. X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent

Example 3. In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

Example 4. A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, GST is payable on the total amount charged by B. Value of the taxable service for charging GST is what A pays to B.

Example 5. Company X provides a taxable service of rent-a-cab by providing chauffeur driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.