[Analysis] GST on Reimbursements | Navigating the Challenges Post CBIC Circular

Table of Contents

1. Introduction
2. Background
3. Intricacies In the Circular
4. Concluding Remarks

1. Introduction

The much-awaited clarification from the CBIC addressing the taxation of reimbursement of electricity expenses was recently issued. Unfortunately, its intended objective of conclusively resolving the persistent litigation surrounding this matter remains unmet.

The taxability of reimbursement of expenses has been a prolonged debate since the inception of the GST. The core issue revolves around the applicability of GST on amounts reimbursed by the recipient to the supplier for goods or services procured by the supplier on behalf of the recipient.

According to the GST provisions, all expenses incurred by the supplier on behalf of the recipient are generally included in the value of supply, with the exception where the supplier acts as a pure agent. In this regard, the law outlines seven conditions that must be satisfied for a supplier to be considered a pure agent.

A notable development is the recent CBIC circular, which has sparked a debate by introducing a deeming fiction of a pure agent, particularly in cases where expenses are reimbursed on an ‘actual basis’. Although the Circular has touched on the concepts of composite supply and pure agent, it falls short of providing clear guidance on the specific circumstances under which each concept is to be applied.

Hence, it becomes significantly relevant to understand the intricacies involved in the Circular and explore the lingering questions that remain unanswered and require further evaluation. This article delves into the ongoing issues related to the reimbursement of expenses along with the intricacies caused by the CBIC Circular to give a clearer understanding of this challenging landscape.

2. Background

2.1 Legal Provisions under the GST Law

While the GST law does not specifically provide for the taxability of reimbursement of expenses, it is provided¹ that the value of supply includes the following amounts:

• Incidental expenses charged by the supplier to the recipient of a supply
• Any amount charged for anything done by the supplier in respect of the supply at the time of or before delivery of goods or supply of services

It is essential to note that incidental expenses refer to costs incurred in addition to the primary supplies but are integral to these supplies.

In light of the above points, it can be inferred that the expenses incurred by the supplier, whether they are an integral part of the main supply or out-of-pocket expenses, will be incorporated into the value of supply. Hence, the valuation provisions in itself cover every possible aspect of value that can be incurred by the supplier.

Only in cases where the supplier acts as a pure agent for the recipient, the value of expenses is allowed to be excluded from the value of supply. Rule 33 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) outlines a set of conditions that must be fulfilled to qualify for such exclusion from the value of supply. Failure to meet any of these specified conditions will result in the reimbursement amount being included in the value of supply.

Significantly, the concept of composite supply adds another layer of importance to the discussion. In a composite supply, where multiple goods or services are supplied together, there might be situations where one of the components involves expenses that are reimbursed by the recipient. Currently, there is a lack of clarity on the application of the legal provisions related to composite supply in the context of reimbursement of expenses.

On a conjoint reading of the above-stated legal provisions, ambiguities arise as to when the expenses should be considered ‘bundled’ with the main supply, when they should be considered ‘incidental’ to the main supply, and when they can be excluded from the value of the supply based on the provisions related to a pure agent.

2.2 Jurisprudence So Far

The above ambiguity has led to divergent rulings in various jurisdictions. Certain pertinent rulings are discussed below:

2.3 Clarification by the CBIC

Circular No. 206/18/2023-GST, dated 31-10-2023 is recently issued by the CBIC to provide clarity on the applicability of GST on various services. Amongst various issues addressed in the circular, it was also clarified that whether GST is applicable on the reimbursement of electricity charges received by real estate companies, malls, airport operators, etc. from their lessees/occupants. The said clarification is summarized below:

• Whenever electricity is being supplied and is bundled with renting of immovable property and/or maintenance of premises, it forms part of the composite supply and shall be taxed accordingly. In such case, the principal supply would be renting of immovable property and/or maintenance of premise, as the case may be, and the supply of electricity would be an ancillary supply.
• The supplies will constitute a composite supply even if a separate invoice is issued for electricity charges. Further, the rate of the principal supply i.e., GST rate on renting of immovable property and/or maintenance of premise would be applicable on such reimbursements.
• Where the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc. charge for electricity on an actual basis i.e., they charge the same amount as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as pure agent for this supply.

3. Intricacies In the Circular

Through the above-mentioned Circular, the Government aimed to tackle extended legal disputes concerning the taxability of reimbursements. However, the circular failed to achieve its intended purpose, leading to increased confusion instead of providing clarity. The ambiguities arising after the issue of Circular and the above-cited rulings are discussed in detail in the below paragraphs.

3.1 Deeming fiction in case of reimbursement on an actual basis

The Circular deems RWA as a pure agent of the members in case where the electricity charges are reimbursed on an actual basis and, thereby excluding such reimbursements from the value of supply.

Notably, Rule 33 outlines specific conditions, and failure to meet these conditions leads to the inclusion of the reimbursement amount in the value of supply. It is crucial to note that neither Rule 33 nor Section 15 confers any authority to ‘deem’ specific cases as meeting the conditions of a pure agent where those conditions are not actually fulfilled.

This raises the question on the validity of the said deeming fiction and also about the extent to which such a deeming fiction can be exercised.

3.2 Ambiguity as to the scope of ‘actual basis’

The Circular allows the supplier to be considered as pure agent where electricity expenses are reimbursed on the ‘actual basis’ i.e. where the same amount is charged from their lessees or occupants as charged by the State Electricity Boards or DISCOMs from the RWAs. Notably, the intention seems to be to cover the scenarios, such as, where reimbursement is made on the basis of sub-meters.

However, the circular remains silent on other instances, such as where RWAs recover the actual common area electricity charges from the members on pro rata basis (say, based on the carpet area of each portion).

This raises concerns of whether these scenarios can also be considered as recovery on ‘actual basis’ and whether the benefit of ‘pure agent’ can be extended in such cases.

3.3 Circular fails to clarify the applicability of relevant provisions on different facts

The Circular states that where the electricity is supplied by Real Estate Owners, RWAs, Real Estate Developers, etc. as a pure agent, it will not form part of value of their supply. Further, where such suppliers charge for electricity on an actual basis, they will be deemed to be acting as pure agent for the said supply.

On the other hand, it states that whenever electricity is being supplied as a bundle by the real estate companies, malls, airport operators etc., to their lessees or occupants, it forms a part of the composite supply and shall be taxed accordingly.

Thus, the circular fails to address the factual scenarios where each of the concepts is to be applied. Given the conflicting jurisprudence on different factual situations, there is a need for clear guidelines on when each of these concepts is applicable based on the relevant factual circumstances.

3.4 Composite supply even if separate bill is raised for reimbursements

The Circular states that irrespective of whether a separate bill is issued for reimbursement of electricity charges, the supplies would still be considered as a composite supply. This clarification² seems to be contrary to the earlier clarification issued by the CBIC in the case of servicing of cars involving supply of spare parts and services of labour. In the said circular, it was clarified that where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the respective rates as applicable to such goods and services separately.

The presence of these conflicting clarifications not only leave the matter unsettled for the reimbursement of expenses but also casts doubt on the concept of composite supplies, particularly when the values of goods and services provided in connection with each other are billed or shown separately.

3.5 Absence of guidance on interpreting the terms ‘bundled’ and ‘incidental’

The existing jurisprudence suggests a contradictory approach on the issue of reimbursement of electricity expenses. In one ruling, the electricity supply is considered as ancillary supply whereas, in another ruling, the expenses are included in the value of supply after being considered as ‘incidental’ expenses. Since, the Advance Ruling Authorities have not provided a reasonable basis on such differential treatment, there was a need for a detailed guidance on the interpretation of the terms ‘bundled’ and ‘incidental’ in context of the reimbursement of expenses.

If these issues had been addressed in the current circular, it would have provided a clearer understanding of the applicability of these concepts, not only in relation to electricity expenses but also for other incidental expenses.

4. Concluding Remarks

The issuance of the Circular by the CBIC aimed to address the taxability of reimbursement of electricity expenses by deeming the supplier as a pure agent in cases where reimbursement occurs on an actual basis. While this may appear to benefit taxpayers, the Circular lacks concrete clarity as it refrains from referencing specific factual scenarios. Instead of providing the expected resolution, it introduces complexity and raises additional questions.

Given the prolonged debate and existing contradictory jurisprudence on this matter, there is a pressing need for a comprehensive examination to clarify the taxability of such reimbursements. The circular, being binding on field formations, not only opens the door for potential litigation concerning the reimbursement of electricity expenses but also extends its impact to the taxability of other expense reimbursements such as reimbursement of out-of-pocket expenses in a professional assignment.

In the absence of further clarification, it is imperative for taxpayers to meticulously review their contracts to ascertain eligibility for availing the ‘pure agent’ status. Additionally, they need to assess whether their supplies are bundled with principal supplies, as this could have significant implications on taxability.

1. Section 15(2)(c) of the CGST Act
2. Circular No. 47/21/2018-GST dated 08-06-2018