GST on Reimbursements: Challenges post CBIC Circular

CBIC Circular on GST Reimbursements :The Goods and Services Tax (GST) has seen a constant evolution and one area, which has enhanced attention, is the taxation of reimbursements. Recent circular issued by the Central Board of Indirect Taxes and Customs (CBIC) has injected new challenges and opportunities into the GST aspect. In the current guide, we are going to explore the GST on Reimbursements | Navigating the Challenges Post CBIC Circular.

1. History:

Legal provisions under the GST Law

The interpretation of the GST law concerning the taxability of GST on reimbursement of expenses is a nuanced subject, and the existing provisions offer insights into how such transactions are treated.

The GST law, while not explicitly addressing the taxability of GST on reimbursement of expenses, incorporates certain elements in the valuation of supply. Incidental expenses charged by the supplier and amounts charged for activities related to the supply fall within the ambit of the value of supply. These incidental expenses are costs integral to the primary supply, and the valuation provisions encompass various aspects of expenses incurred by the supplier.

The significant part is to evaluate the provisions offer all conceivable expenditures occurred by the supplier, whether integral to the main supply or out of pocket expenditures. The supplier has performed as a pure agent for the recipient; it is the only exception to the inclusion. The provision of Central Goods and Services Tax Rules, 2017, the rule 33 provides appropriate situations for the exclusion of expenses from the supply value, and acting as a pure agent. Failure to meet these situations outcomes in the reimbursement amount being involved in the supply value.

Further, the concept of composite supply makes the matter more complicated. In the matter of composite supply, where various goods or services are given together, conditions may increase where one element includes expenses of reimbursed by the recipient. However, the legal provisions application about the composite supply in terms of expense reimbursement lacks clarity in current situation.

When one is evaluating whether expenses should be taken as “bundled” with the main supply, considered as “incidental” to the main supply, or eligible for exclusion based on pure agent rules. A more detailed understanding and clarification from authorities may be required to navigate these complexities effectively.

Clarification by the CBIC

Circular No. 206/18/2023-GST, dated 31-10-2023, issued by the CBIC, brings much-needed clarity on the intricate issue of the applicability of GST on reimbursement of electricity charges. The circular specifically addresses scenarios involving real estate companies, malls, airport operators, etc., and their receipt of electricity charges from lessees or occupants.

According to the circular, when electricity supply is bundled with the renting of immovable property and/or maintenance of premises, it constitutes a composite supply. In such cases, the principal supply is considered to be the renting of immovable property and/or maintenance of premises, with the supply of electricity categorized as an ancillary supply.

Even if a separate invoice is issued for electricity charges, the supplies continue to be treated as a composite supply. Importantly, the circular establishes that the GST rate applicable to the principal supply (renting of immovable property and/or maintenance of premises) will be levied on these reimbursements.

The circular further addresses situations where entities such as Real Estate Owners, Resident Welfare Associations (RWAs), and Real Estate Developers charge for electricity based on the actual amount charged by State Electricity Boards or DISCOMs. In such cases, these entities will be deemed to be acting as pure agents for this supply.

This clarification not only provides a clear framework for determining the tax treatment of electricity charges in specific contexts but also underscores the importance of recognizing the principal supply in composite transactions. It emphasizes the application of GST rates on renting of immovable property and/or maintenance of premises to the GST on reimbursements, ensuring a more transparent and consistent approach in the realm of GST on real estate-related services. Businesses operating in these sectors will find this guidance invaluable as they navigate the complexities of GST compliance in the context of electricity charge reimbursements.

2. Challenges in the Circular

There are certain ambiguities arising from the challenges of Circular, CBIC Circular on GST Reimbursements provide some details below:

Deeming fiction likes to reimburse on an actual basis

The circular has RWA as a pure agent of the members, where the electricity charges are reimbursed on an actual basis and, thereby excluding such reimbursements from the supply value. Rule 33 provides the conditions and failure to meet these conditions leads to GST on reimbursement inclusion in the supply value. It is circular with a note that neither Section 15 nor Rule 33 offers any authority to “deem” particular cases as fulfilling the conditions of a pure agent where those conditions are not fulfilled.

It will raise the question of the validity of said deeming fiction and also concerning expanding which deeming fiction can be exercised.

Uncertainty in the scope of “actual basis”

The circular permits the supplier to be taken as a pure agent as electricity expenses are reimbursed on an actual basis. For instance, where a similar number is charged from their lessees as charged by the DISCOMs State Electricity Boards from the RWAs. In this case, the GST on reimbursement is made, which depends on the sub-meters.

However, the circular has not mentioned the other instances where RWAs recover the common area electricity charges from the members on a pro-rata basis. The main concern is whether these conditions can also be taken as recovery on an actual basis and whether the benefit of pure agents can be expended in such cases.

Composite supply in case of separate bill is raised for reimbursements

The apparent contradiction between Circular No. 206/18/2023-GST, which states that the supplies would be considered a composite supply even if a separate bill is issued for reimbursement of electricity charges, and an earlier clarification regarding servicing of cars raises questions about the consistency of GST interpretations.

In the case of servicing cars involving the supply of spare parts and labour services, the CBIC had previously clarified that if the value of goods and services is shown separately, they would be liable to tax at their respective rates.

This inconsistency in clarifications creates uncertainty, especially concerning the treatment of composite supplies when the values of goods and services provided in connection with each other are billed separately. The differing interpretations may lead to challenges in understanding how GST applies to various transactions involving expense reimbursement GST.

For businesses and taxpayers, this inconsistency underscores the importance of staying updated on the latest circulars and clarifications issued by the CBIC. It also highlights the need for further clarity and uniformity in interpreting GST laws, particularly in situations involving composite supplies and separate billing for various components.

No guidance on interpreting the terms “incidental” and “bundled”

As per the current jurisprudence guide a contradictory concept on the issue of reimbursement of electricity expenses. In one ruling, the supply of electricity is taken as an ancillary supply, on the other ruling, the expenses are covered under the supply value after being taken as incidental expenses.

Since the Advance Ruling Authorities have not given a valid basis for such differential treatment, there was a requirement for detailed instruction on the interpretation of the concepts of “incidental” and “bundled”. These issues had not been mentioned in the current circular, however, if it had been, then it would have given a clearer understanding of the applicability of these concepts, not only about the electricity expenses but also for other incidental expenses.

Conclusion

CBIC Circular on GST Reimbursements: the circular issued by the CBIC purposed to provide the taxability of GST on reimbursement rules for electricity expenses by deeming the supplier as a pure agent. In matters where charging GST reimbursement rules happens on an actual basis. While this may seem to benefit taxpayers, the circular has not mentioned the refrain from referencing particular factual scenarios. Instead of giving the expected resolution, it begins with the complexity and raises additional questions.