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Applicability of GST to an Agent

        [Updated as on March 31, 2020]

 

 

Principal and Agent

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Section 182 of the Indian Contract Act, 1972 defines “Agent” and “Principal” as follows:

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An “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.

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Thus the agent is meant to act for or to represent his principal on his behalf in dealings with third persons. The role of agent is therefore of a representative nature.

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In GST, Section 2(5) defines “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. Section 2(88) defines “principal” to means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.

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Thus an agent is engaged in two types of businesses irrespective of their role:

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1. receipt of goods or services on behalf of his principal; or

2. supply of goods or services on behalf of his principal

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This can be made clear with the help of following examples.

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1. X, a cashew nut exporter has engaged Y for procurement of raw cashew from various farmers in Andhra Pradesh. Here A is the agent who will receive the raw cashew on behalf of X who is the principal and later transport the same to X.

2. A is an automobile manufacturer who has engaged B as his dealer for sale and service of vehicles. Here A is the principal and B is his agent providing supply of goods or services on behalf of the principal.

 

 

Agent treated as ‘Supplier’ or ‘Recipient’ in GST

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As per section 2(93), the term “recipient” of supply of goods or services or both shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied. Also as per section 2(105) “supplier” in relation to any goods or services or both, shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied. Thus an agent could be treated either as recipient or supplier in relation to the goods or services or both received or supplied.

 

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Identifying principal agent relationship

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An agent is defined in GST by various roles in which he is engaged in the business of supply or receipt of goods or services or both on behalf of his principal. The various representative roles of agents in business transactions are well covered in the definition. However in order to identify whether a principal agent relationship exists between parties in a particular transaction, it has to be ascertained whether either of the party wears a representative hat and is doing something merely on behalf of another. The identification of such relationship is important in the context of the following entry in Schedule I:

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As per para 3 of Schedule I, following activity shall be treated as supply even if made without consideration:

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 Supply of goods—

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(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

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(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

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Lets understand the first scenario by an example given below:.

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A has engaged B to popularize its product and to make sale to interested customers. A has moved goods to B who in turns sold it to various customers identified by them. Sales by B to its customers will be taxable under GST as the goods are sold for a consideration. However since the transfer of goods by A to B is without any consideration whether the transaction between A and B is taxable?

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For this, three questions are to be answered.

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1. Whether a principal agent relationship exists between the parties?

2. Whether such relationship falls within the ambit of para 3 of Schedule I?

3. Whether supply of goods is involved in the transactions?

 

Answer to the first question is very clear as B is acting on behalf of A to sell the goods produced by A.

 

In order to answer the second question in the GST scenario, it has to be seen whether the invoice for the further supply of goods on behalf of A is being issued by B or not. Where the invoice for further supply is being issued by B in his name then, B shall be treated as an agent for the purpose of Schedule I and any provision of goods from A to the agent B would fall within the fold of the said entry. However, it may be noted that in cases where the invoice is issued by B to the customer in the name of the principal who is A, such agent shall not fall within the ambit of Schedule I of the CGST Act and the transaction between A and B will not be treated as supply.

 

Answer to the third question is ‘yes’. It should be noted that para 3 of schedule I speaks only about supply of goods without consideration. Thus supply of services is taxable only if consideration is involved in the transaction. Therefore in case of supply of services it does not matter who issues the invoice as only supply of goods between principal and agent is covered by Schedule I.

 

If all the questions are answered to the affirmative, the transaction will be covered by the entry in the schedule and will be treated as a supply even if made without consideration and consequently taxable.

 

We can use following example to understand the second scenario:

 

X has engaged Y to procure raw cashew from various farmers and to supply the same to their godown. In this case, Y is acting as agent of X and supply of goods is involved in the transaction. The prime question is in whose name the invoice in respect of the goods received by the agent is issued. Where the goods being procured by Y on behalf of X are invoiced in the name of Y then further provision of the said goods by Y to the principal X would be covered by the said entry and taxable.

 

A clarification was issued by CBIC vide Circular No. 57/31/2018-GST dated 04/09/2018 regarding identification of a principal agent relationship in a transaction in the context of Schedule I. The following scenarios discussed in the circular are reproduced below for further understanding:

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Scenario 1

Mr. A appoints Mr. B to procure certain goods from the market. Mr. B identifies various suppliers who can provide the goods as desired by Mr. A, and asks the supplier (Mr. C) to send the goods and issue the invoice directly to Mr. A. In this scenario, Mr. B is only acting as the procurement agent, and has in no way involved himself in the supply or receipt of the goods. Hence, in accordance with the provisions of this Act, Mr.B is not an agent of Mr. A for supply of goods in terms of Schedule I.

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Scenario 2

M/s XYZ, a banking company, appoints Mr. B (auctioneer) to auction certain goods. The auctioneer arranges for the auction and identifies the potential bidders. The highest bid is accepted and the goods are sold to the highest bidder by M/s XYZ. The invoice for the supply of the goods is issued by M/s XYZ to the successful bidder. In this scenario, the auctioneer is merely providing the auctioneering services with no role played in the supply of the goods. Even in this scenario, Mr.B is not an agent of M/s XYZ for the supply of goods in terms of Schedule I.

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Scenario 3

Mr. A, an artist, appoints M/s B (auctioneer) to auction his painting. M/s B arranges for the auction and identifies the potential bidders. The highest bid is accepted and the painting is sold to the highest bidder. The invoice for the supply of the painting is issued by M/s B on the behalf of Mr. A but in his own name and the painting is delivered to the successful bidder. In this scenario, M/s B is not merely providing auctioneering services, but is also supplying the painting on behalf of Mr. A to the bidder, and has the authority to transfer the title of the painting on behalf of Mr. A. This scenario is covered under Schedule I. A similar situation can exist in case of supply of goods as well where the C&F agent or commission agent takes possession of the goods from the principal and issues the invoice in his own name. In such cases, the C&F/commission agent is an agent of the principal for the supply of goods in terms of Schedule I. The disclosure or non-disclosure of the name of the principal is immaterial in such situations.

 

Scenario 4

Mr A sells agricultural produce by utilizing the services of Mr B who is a commission agent as per the Agricultural Produce Marketing Committee Act (APMC Act) of the State. Mr B identifies the buyers and sells the agricultural produce on behalf of Mr. A for which he charges a commission from Mr. A. As per the APMC Act, the commission agent is a person who buys or sells the agricultural produce on behalf of his principal, or facilitates buying and selling of agricultural produce on behalf of his principal and receives, by way of remuneration, a commission or percentage upon the amount involved in such transaction. In cases where the invoice is issued by Mr. B to the buyer, the former is an agent covered under Schedule I. However, in cases where the invoice is issued directly by Mr. A to the buyer, the commission agent (Mr. B) doesn’t fall under the category of agent covered under Schedule I.

 

 

Compulsory registration by an agent

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As per section 24(vii), persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise are required to obtain registration without considering the threshold limit of Rs.20 lacs applicable under section 22(1). Accordingly, the requirement of compulsory registration for an agent, under the said clause shall arise when both the following conditions are satisfied, namely: -

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(a) the principal should be a taxable person; and

(b) the supply of goods or services made by the agent should be taxable.

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An agent shall be deemed to be providing taxable supplies of goods or services when they issue invoice in respect of such supply on behalf of the principal in their own name rather than in the name of the principal. In such cases, they are liable to get compulsory registration without considering the threshold limit of Rs.20 lacs. But where the agent is providing supply on behalf of the principal but the invoice is issued either by the principal or by the agent in the name of the principal, the agent cannot be said to be making any taxable supply on behalf of the principal as the supply is provided in the name of the principal. But the agent is indeed providing taxable supply which is in the nature of agency services provided to the principal in their own name for which the invoice will be issued in their name only. However threshold limit will be considered for obtaining registration in such cases.

 

Lets understand this on the basis of the scenarios discussed earlier:

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In scenario 1 and scenario 2, Mr. B shall not be liable to obtain registration in terms of clause (vii) of section 24 of the CGST Act as he is merely acting as a procurement agent and auctioneer respectively and not issuing any invoice in his name and thereby not directly providing any taxable service. He, however, would be liable for registration if his aggregate turnover of supply of taxable services exceeds the threshold limit of Rs.20 lacs specified in sub-section (1) of section 22 of the CGST Act.

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In scenario 3, M/s B shall be liable for compulsory registration in terms of the clause (vii) of section 24 of the CGST Act as he is providing taxable supply with the invoice being issued in his name.

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In respect of commission agents in Scenario 4, notification No. 12/2017 Central Tax (Rate) dated 24.06.2017 has exempted “services by any APMC or board or services provided by the commission agents for sale or purchase of agricultural produce” from GST. Thus, the “services‟ provided by the commission agent for sale or purchase of agricultural produce is exempted. Such commission agents (even when they qualify as agent under Schedule I) are not liable to be registered according to sub-clause (a) of sub-section (1) of section 23 of the CGST Act, if the supply of the agricultural produce, and /or other goods or services supplied by them are not liable to tax or wholly exempt under GST. Generally, a commission agent under APMC Act makes supplies on behalf of an agriculturist. Further, as per provisions of clause (b) of sub-section (1) of section 23 of the CGST Act an agriculturist who supplies produce out of cultivation of land is not liable for registration and therefore does not fall within the ambit of the term “taxable person‟. Thus a commission agent who is making supplies on behalf of such an agriculturist, who is not a taxable person, is not liable for compulsory registration under clause (vii) of section 24 of the CGST Act. However, where a commission agent is liable to pay tax under reverse charge, such an agent will be required to get registered compulsorily under section 24 (iii) of the CGST Act.”

 

 

Valuation of supply

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Usually where an agent supplies goods or services on behalf of a principal, he charges amount in the nature of commission for the services rendered. This commission amount is taxable and the taxable value shall be the amount billed by the agent in his invoice issued to the principal as per section 15(1) of CGST Act.

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In case of supply of goods through agent, sometimes goods are sent to the agent who in turn sells to various customers on behalf of the principal. The goods are sent without any consideration and the question of valuation of such goods does not arise. However there are situations where the agent issue invoices in his own name for the goods sold by him on behalf of the principal rather than in the name of the principal. Such transactions falls under the ambit of para 3 of schedule I discussed earlier and therefore the supply of goods between the principal and agent shall be deemed to be a ‘supply’ for the purpose of GST and chargeable to tax. Since no consideration is involved in such transaction, the valuation shall be done as per Rule 29.

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Valuation of supply of goods made or received through an agent

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Valuation of supply of goods made or received through an agent is determined in accordance with Rule 29 of CGST Rules as under:

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The value of supply of goods between the principal and his agent shall-

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• be the open market value of the goods being supplied, or at the option of the supplier, be ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient.

 

Let’s understand this with an example:

A supplied almonds to his agent for further supplies to its customers. Open market value of almonds of same kind and quality is Rs.2000 per Kg on the day of supply. The agent made sale of almonds of same kind and quality on the same day in his name at Rs.2500 per kg. The value of supply being made by the principal A will be determined as follows:

 

1. Open market value of the goods supplied is Rs.2000 per kg; or

2. If the principal so decides, 90% of Rs.2500 being the price charged by the agent for like goods => Rs.2250 per kg

 

 

• where the value of a supply is not determinable under clause (a), the same shall be determined by the application of rule 30 or rule 31 in that order.

 

Rule 30 provides for determining the value of supply of goods or services or both based on cost. Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. For instance, A principal is moving goods manufactured at its unit to its agent for further supply. The open market value of similar goods is not available and the agent is not engaged in sale of similar goods. In such situations, the valuation shall be made at 110% of the cost of production or manufacture of the goods. Assume the goods cost Rs.20000, then the value of supply shall be 110% of Rs.20000 which is Rs.22000.

 

Rule 31 is a residual method for determination of value of supply of goods or services or both. Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter: Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30. The valuation shall vary on a case to case basis depending on the facts of the case.

 

 

Valuation of supplies in respect of service by an air travel agent

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Usually an air travel agent is required to pay GST on the commission amount earned from airline companies in addition to service charges, handling charges etc. (by whatever name called) collected from the customers / passengers. In such cases the valuation shall be as per Section 15(1) being the amount charged or received by these agents. Alternatively an air travel agent can adopt valuation as per Rule 32(3).

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Rule 32(3) provides that the value of the supply of services in relation to booking of tickets for travel by air provided by an air travel agent shall at the option of the supplier be deemed to be an amount calculated at the rate of:

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1. five percent. of the basic fare in the case of domestic bookings, and

2. ten per cent. of the basic fare in the case of international bookings

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Explanation.- For the purposes of this sub-rule, the expression basic fare‖ means that part of the air fare on which commission is normally paid to the air travel agent by the airlines.

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In case an air travel agent opts to pay GST as per Rule 32(3), he is not required to pay GST separately on commission, if any, received from the airlines as well as service charges / booking charges / management charges from the customer / passenger. An air travel agent can pay tax under any of the 2 options on transaction to transaction basis and need not opt for any of the options uniformly throughout the given financial year. In case an air travel agent buys ticket from IATA agent and charge service charges only from the customer / passenger as his mark-up, such agent is not authorized to opt for valuation as per Rule 32(3). He will pay 18% GST on his service charges disclosed separately in the invoice issued by him to the customer.

 

Illustration

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A has booked air ticket to London through agent B for Rs.30000. B is entitled to commission at 8% on Rs.20000 out of the ticket charge of Rs.30000. The value of supply of service by the agent B to airline company shall be:

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10% of Rs.20000 [Rs.20000 being the amount on which commission is paid to the agent] which is Rs.2000

 

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Pure agent

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Pure agent means a person who-

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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 supplied as pure agent of the recipient of supply;

3. does not use for his own interest such goods or services so procured; and

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.

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Let us understand the concept of pure agent with an example:

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A is a corporate services firm engaged to handle the legal work pertaining to the incorporation of Company B. A incurs expenditure towards registration fee, name approval fee etc which the firm pays directly to Registrar of Companies on behalf of Company B. Here A makes such payment purely as an agent of B and collects reimbursement of only the actual amount so paid to the Registrar in addition to their normal service charges in respect of the services offered by them. Therefore, A‘s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

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Value of supply of services in case of pure agent (Rule 33).-

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The valuation of supply in respect of services by a pure agent shall be done as per section 15 of CGST Act. However the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-

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

2. 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

3. 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.

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In the above example, A has acted as a pure agent of the recipient of supply which is B and makes payment to the Registrar on authorization by B. The payment so made on behalf of B is shown separately in the invoice issued by A to B. A here has made such payment in addition to the services rendered in their own account towards incorporation of Company B. Hence A has complied with all the conditions mentioned in the said rule and the value of service rendered by A to B shall be worked out as follows: