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.
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.
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:
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:
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:
Quick Note: GST is not applicable on foreign commission.
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:
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.
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:
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.
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)
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,
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.