Reimbursement under Service Tax vs GST

Practicality of Reimbursement deduction in GST

The tug of war of the Revenue to include every cost incurred by the supplier in the value of goods and services and the efforts of tax payers seeking out deduction from the taxable values has been there in sales tax, central excise, service tax and now in GST. In this article we examine what exactly was the dispute in service tax (which were eventually decided in favour of the service provider) and whether the similar position can be taken in GST for various types of transaction.

Service Tax Experience

The service tax valuation rules had under rule 5 (1) set out that the expenses or costs incurred in the course of providing a service ( could be in relation to or incidental) are ot be included in the gross value of service. This was objected as Section 67 was only on the amount charged for such services. Amounts charged other than for the services was disputed as not liable. This view was also taken for fuel/ explosives provided by the Customer to the service provider without which the service could not have been rendered. Also in case of builders/ contractors who were supplied steel and cement which was used in the construction of the factory/ building. The Larger bench of Hon’ble CESTAT in case of Bhayana Builders Pvt. Ltd. v. Commissioner — 2013 (32) S.T.R. 49 (Tribunal-LB) (confirmed by Hon’ble SC in 2018 reported in 2018 (10) G. S. T. L. 118 (SC)) had held that tax could only be on the gross amount charged and therefore the Free of Cost supplies could not be included. In the year 2015, the Section 67 of Finance Act, 1994 (valuation section) was enlarged to include reimbursements and therefore the defence of “gross amount charged” may not be relied on unless further decisions come.

The Hon’ble Supreme Court in case of UOI v. Intercontinental Consultants and Tehnocrats Pvt Ltd [2018 (10) GSTL (40) (SC)] has upheld the 2013 Delhi High Court decision that Rule 5 (1) of the Service Tax (Determination of Valuation) Rules, 2006 as amended was ultra vires of Section 67, ibid. Therefore, under service tax there is no liability for separately charged amounts which were not part of the service. There was also a rule 5(2) which allowed for not including the value subject to one being a pure agent ( 4 conditions) and complying with further conditions ( 8). Many of the conditions were not possible to be complied as impracticable and therefore the challenge to rule 5 (1), ibid.

Position under GST:

The GST would be levied on the transaction value (invoiced) which would be the price payable/paid for supply as long as it is between unrelated parties and price is the sole consideration. [Sec15(1)]. Further, section 15 requires that

• Where one supplies goods or services then he needs to ensure that the above-referred transaction value includes all amounts that the supplier is liable to incur in relation to such supply before or at the time of supply. [ sec15(2)(b)]
• Any incidental expenses for anything done by the supplier in respect of the supply is to be included. [ sec 15(2)(c)]

Thus, GST laws made an attempt to specify that reimbursements must be part of taxable value. But it should not lead to include all amounts received from the recipient unless there is legal reciprocity between the suppliers & recipient. The Hon’ble HC in case of Bai Mamubai Trust Vs Suchitra 2019-TIOL-2158-HC-MUM-GST held that “In the absence of reciprocal enforceable obligations, it would not be correct to characterise the Defendant’s occupation of the Suit Premises against payment of royalty as a ‘supply’ for ‘consideration’ on which GST is payable by the Court Receiver.”

Therefore, establishing the legal reciprocity would be a deciding factor while taxing/excluding the ‘Reimbursements’.

Further, the obligation of the receiver being taken by the supplier could still enjoy the exclusion under Rule 33 of CGST Rules, 2017 as amended. The coverage u/r. 33, ibid may ensure that one is derisked.

The illustrative list of the common expenses which can fall within the above inclusion and which may get excluded are tabulated below:

Possible Practical Solutions

The tax optimisation without exposure or limited exposure in such transactions may be done in the following manner to optimise tax net of credits and also avoid disputes and consequent cost of resolution:

• The receiver who is registered under GST who is eligible for the GST credit (on activities in furtherance of business) may like to avoid any break up and go for a composite contract for supply of goods and services. This would also enable the supplier to avail the credit of the GST paid on all the taxable supplies involved and ensure that benefit passed on to the customer.
• The receiver who is unable to avail the credit or unwilling to avail the credit and go for a lengthy refund procedure ( at present manual and taking time - expected to be fast in due course of time- when not known) could however follow Rule 33 where applicable. This rule has been rationalised as to the definition of pure agent ( 3 conditions) as well as further ( only 4 compared to 8 earlier) Those who do not follow Rule 33 may face disputes which may again involve writ in the high court and subsequent resolution by Supreme Court which could take a few years.

Conclusion

Suppliers who are looking at excluding the value of goods or services which are not in relation to the supply or not incidental to the supply may seek the

• clarity from the GST Council,
• Go for advance ruling if amounts are significant.
• It could also be a good idea to seek the confirmation of the jurisdictional revenue officer by sending a letter enclosing the contract and reason for exclusion. This would at least provide a defence for demands for longer period.