GST update on treatment of reimbursement of expenses

The issue as regards treatment of reimbursement of expenses has been a matter of concern in the service tax regime and will be an issue to be considered in GST regime too. In the service tax regime, the Hon’ble Delhi High Court, in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. Versus Union of India [2013 (29) S.T.R. 9 (Del)] had quashed Rule 5 of the Service Tax Determination of Value Rules, 2006 pertaining to inclusion of reimbursement of expenditure in the taxable value of service as ultra vires the charging section. It is also worth mentioning that the said decision is pending in Supreme Court for final verdict. The issue as regards inclusion of reimbursement of expenditure in the value of supply will definitely be a matter of concern in the GST regime as well as there is no express provision for the same. Hence, the assessees are in delimma whether to include the value of reimbursement of expenses in the taxable value of supply for the purpose of levy of GST.

If the CGST Act, 2017 is studied, it is found that the valuation of taxable supply is governed by section 15 which does not expressly mentions about inclusion of the reimbursement of expenses. At the same time, it is also worth mentioning that the draft GST Act, 2016 specifically mentioned in section 15(g) that any reimbursable expenditure or cost incurred by or behalf of the supplier and charged in relation to the supply of goods and/or services shall be included in the value of taxable supply of goods or services. It is pertinent to note that the above specific provision as regards inclusion of reimbursable expenditure has been removed in the Final CGST Act, 2016. One may interpret that the intentional deletion of the specific clause as regards inclusion of reimbursable expenditure indicates that the same are not to be included in the taxable value of supply. However, at the same time, it is to be kept in mind that the Draft GST Act, 2016 has no legal sanctity. Also, some learned authors are of the opinion that the reimbursement of expenditure is to be included in the taxable value of supply.

It is further submitted that the concept of pure agent has been carried in the GST regime also in Rule 33 of the CGST Rules, 2017 whereby the expenditure or costs incurred by supplier as pure agent of the recipeint of supply shall be excluded from the value of supply provided that payment made by the pure agent on behalf of the recipeint of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service. This provision may prove to be helpful to the assessees if the reimbursable expenditure is proved to have been incurred in the capacity of pure agent. This may be fruitful particularly in case of reimbursement of electricity/water bill charges by tenants to the landlord, if the said amount is separately indicated in the invoice and the landlord recovers the actual charges only. Moreover, in case of electricity charges, the same are outside the ambit of GST net and so the said charges should not form part of the taxable value of supply otherwise also.

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GST update on treatment of reimbursement of expenses

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