When a service provider incurs expenses on behalf of the client and recovers them as reimbursement, the question is whether such reimbursement is included in the value of supply and subject to GST. The pure agent concept under Rule 33 of the CGST Rules provides an exclusion.
What Is a Pure Agent?
Rule 33 of the CGST Rules states that 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 certain conditions are met.
A pure agent is a person who:
- Enters into a contractual agreement with the recipient to incur costs on behalf of the recipient.
- Neither intends to hold nor holds any title to the goods or services procured.
- Does not use the goods or services so procured for his own interest.
- Receives only the actual amount incurred, without any markup or profit.
Conditions for Exclusion
The exclusion applies only if all the following conditions are satisfied:
- The supplier acts as a pure agent of the recipient when paying the third party.
- The payment made by the pure agent on behalf of the recipient is separately indicated in the invoice.
- The supplies procured by the pure agent are in addition to the services he supplies on his own account.
- The supplier does not claim input tax credit on the goods or services procured as pure agent.
If these conditions are met, the reimbursement amount is excluded from the value of the supplier's service, and no GST is charged on that reimbursement.
Examples
Example 1: Advocate Reimbursing Court Fees
An advocate pays court fees of Rs 10,000 on behalf of a client and later bills the client:
- Professional fee: Rs 50,000 plus GST.
- Court fees reimbursement: Rs 10,000 (excluded from value).
The advocate's invoice shows professional fee of Rs 50,000 plus GST on Rs 50,000. The Rs 10,000 court fees reimbursement is shown separately and not taxed, provided the advocate did not claim ITC on it and acted as pure agent.
Example 2: Consultant Reimbursing Travel Expenses
A consultant travels for client work and pays for hotel and airfare. The hotel and flight invoices are in the consultant's name but are for the client's project. The consultant bills the client:
- Consultancy fee: Rs 2,00,000 plus GST.
- Hotel and airfare reimbursement: Rs 30,000 (excluded as pure agent).
The consultant must not claim ITC on the hotel and airfare. The reimbursement is excluded.
If Not a Pure Agent
If the conditions are not met, the reimbursement amount is included in the value of the supplier's service and subject to GST. For example, if the consultant pays travel expenses in his own name and claims ITC, then recharges the client, the recharge is part of the taxable value of the consultancy service.
Documentation Requirements
To support pure agent exclusion:
- Contract or engagement letter stating that the supplier will incur expenses on behalf of the client as pure agent.
- Separate itemisation of expenses in the invoice.
- Copies of third-party invoices.
- No ITC claimed on those expenses.
Practical Compliance Steps
- Identify all reimbursements.
- Determine if pure agent conditions are satisfied.
- If yes, show separately and exclude from taxable value.
- If no, include in value and charge GST.
- Maintain documentation and agreements.
Common Mistakes
- Charging GST on pure agent reimbursements unnecessarily.
- Not charging GST on reimbursements that are not pure agent.
- Claiming ITC on expenses incurred as pure agent.
- Not itemising reimbursements separately in invoices.
How Anuj Desai & Associates Can Help
We help businesses structure reimbursement arrangements, apply pure agent rules correctly and manage documentation for GST compliance.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
LinkedIn: linkedin.com/in/ca-anuj-desai-122547230