Read this comprehensive guide by earlyGST to learn how the valuation of supply is done when the supply is made by principal to agent.

Value of Supply of Goods – Principal to Agent

Last Update Date : September 14, 2018

value of supply - principal to agent

Introduction and implementation of GST law has replaced many indirect taxes levied on supplies in the country. Earlier, under the Service Tax law, agents/sub-brokers were not liable to pay the amount of Service Tax as their liability was discharged by the main broker. It was not mandatory for them to get registered.

However, as per rule 29 of the GST Act, any supply of goods to the principal from an agent and vice-versa is chargeable to GST. And hence, they (all commission agents) are liable to get registered under GST as prescribed by The Central Goods and Services Tax Act, 2017.

Quick Note: GST registration is mandatory for every sub-broker and authorised person.

Meaning of Principal

The GST law has provided the definition of the term “principal” as “a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both”. For instance, a bank executive selling personal loans on behalf of a bank is an example of the principal-agent relationship. Another example is a dealership store of an automobile company. Usually in the principal-agent relationship, in most cases, the liability and ownership of transaction stays with the principal and an agent receives a commission for his efforts to supply goods and/or services.

Meaning of Agent

As per section 2(5) of the CGST Act, 2017, ‘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.

Note: In the principal-agent relationship, under a del-credere agency, the agent acts as both a salesperson/broker for the principal and a guarantor of the credit amount extended to the buyer. If the buyer fails to pay the credit sale amount, instead of the principal, the agent is responsible to bear the loss of bad-debts.

As per section 2(13) of the IGST Act, 2017, “intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account”.

Based on the legal definitions, the traits of an agent, in layman terms, can be determined as mentioned below:

  • An agent is a person engaged in the supply or receipt of goods and/or services on behalf of other (the other person is referred to as the ‘principal’).
  • The agent carries on the business of supply and/or receipt of goods and/or services on behalf of the principal.

Meaning of Agency Relationship and Taxable Supply

Under section 24 of the CGST Act, 2017, registration for an agent as a taxable person is compulsory. On the basis of Schedule-I of section 7 of the CGST Act, 2017, the following two scenarios of supplies shall be treated as supply even if made without consideration:

  • Supply by the Principal to Agent: on behalf of the principal, the agent undertakes to supply goods and/or services
  • Supply by the Agent to Principal: on behalf of the principal, the agent undertakes receipt of goods and/or services

Example

Fast-Drive Two-wheelers Ltd has appointed Regal Agency as an agent and supply/receive goods on their behalf upon a mutually agreed rate of commission. As per the agency contract, Regal Agency receives tyres and tubes supplied by Fast-Drive Two-wheelers Ltd. As and when Fast-Drive receives any order from other dealers to supply tyres and tubes, they sent formal instructions with details to Regal Agency. Moreover, Regal Agency is assigned the responsibility of receipt of raw materials from the manufacturers on behalf of Fast-Drive Two-wheelers Ltd.

In this scenario:

  • Principal: Fast-Drive Two-heelers Ltd.
  • The agent of the Principal: Regal Agency
  • Taxable supply by the Fast-Drive to Regal: supply of tyres and tubes
  • Taxable supply by the Regal to Fast-Drive: receipt of raw materials from manufacturers

GST on Commission

  1. GST is mandatory for agent commissions irrespective of the threshold of the annual turnover i.e. threshold of Rs 20,00,000.
  2. The tax is applicable on any income earned as a brokerage or commission.
  3. On commission services, the applicable rate of GST is 18%.
  4. Further, on GST bill relating to a commission value of a supply, TDS is also deductible. TDS will be deducted on the Gross amount, exclusive of GST.
  5. If the commission is paid on such services, Input credit is available for the GST.

Quick Note: GST is not applicable on foreign commission.

Applicability of GST to Agents and Brokers

For both agents and brokers, GST is applicable. However, it is important to understand the nature of the work of “pure agent” to understand the applicability and supply on which GST is applicable.

“Pure agent” under GST is defined as a taxable person who:

  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 a 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.

A “pure agent” under GST is a person who supplies goods/services to the recipient and also receives and incurs expenditure on behalf of the recipient on some other supply and claims actual reimbursement from the recipient of the main supply (without adding it to the value of his own supply) for such supplies.

Taxability of Pure Agent

At the time of computing taxability of the pure agent, the expenditure incurred on behalf of the recipient of services is not taken into account. As per the rules of valuation of goods/services, expenditures incurred as the agent is excluded from the value of supply as well as aggregate turnover.

The circumstances where the value of expenditure incurred is excluded are given below:

  • When the supplier is a pure agent of the recipient and on recipient’s authorisation makes payment to the third party
  • When the pure agent procures supplies from the third party are in addition to the services he supplies at his own as a pure agent of the recipient
  • When the payment made is distinctly mentioned in the invoice issued to the recipient by the pure agent

Valuation of Supply of Goods/Services either Made or Received Through an Agent

The purpose of valuation rule is to determine the correct tax liability. Any supply between the principal and his agent is liable for GST. Further, such principal and his agent shall either individually or jointly be liable to pay the tax on such goods and/or services.

As per the rule, the valuation of supply of goods and/or services either made or received through an agent shall be:

1. Either of (a) open market value or (b) 90% of the price charged for the supply of goods of similar traits and quality by the recipient to his customers that are not related and goods are also projected for further supply by the same recipient.

Example

Suppose, in the previous example, the principal Fast-Drive Two-wheelers Ltd, supplies tyres and tubes to his agent Regal Agency. Regal Agency, supplies tyres and tubes of similar type and quality in consequent supplies at a price of Rs 3,500 per set on the day of supply.

Another independent supplier Zeal Agency is supplying tyres and tubes of similar type and quality to the said agent at the price of Rs 3,000 per set.

Hence, the value of the supply made by the principal Fast-Drive Two-wheelers Ltd shall be either:
Rs 3,000 per set (the open market value of groundnuts)
OR
where he exercises the option the value shall be 90% of INR 3,500 per set i.e. INR 3,150

2. If it is not possible to determine the amount using above rule, either of cost method or residual method shall be used,

How can earlyGST help you?

After the implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.

We hope, this guide answers all the questions you had about the topic. If you still have any question in mind, you can post it on our TaxForum to get it answered from a tax expert.

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