Principal-Agent Relationship under GST by CMA Arun Karnik
Concept of ‘Supply’ under the GST Law:
As the title of the Acts under GST scheme of laws indicates, GST is basically a tax on ‘supply’ of goods or services or both. Hence, occurrence of ‘supply’ is the pivot of the entire GST scheme of laws.
- 7(1) of the CGST Act, 2017 (the Act) provides an inclusive list of transactions that are to be regarded as ‘supply’ under the Act. It includes transactions such as sale, transfer, barter, etc. made or agreed to be made ‘for a consideration’. Thus, presence of consideration is the essential attribute for a transaction to be regarded as a ‘supply’.
Principal- Agent transactions:
- 2(5) of the Act defines agent as under:
“agent” means a person, including a factor, broker, commission agent,
arhatia,del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
Without going into the peculiar characteristics of the different types of mercantile agents detailed in the above definition, it is to be noted that situations arise when:
- a principal supplies goods to the agent which are intended to be
supplied by the agent to customers on behalf of the principal; or,
- an agent receiving goods on behalf of the principal and supplying such
goods to the principal.
In either of the above situations, i. e.
- either the principal supplying goods to the agent to be supplied by the
agent to others on behalf of the principal; or
- the agent supplying goods to the principal which have been received by
the agent from others on behalf of the principal,
there is no sale and hence no consideration passing from the agent to the principal and vice-versa.
Thus, being supplies of goods ‘without, consideration’, such transactions would not qualify to be regarded as ‘supply’ under the Act.
However, such transactions between principal and agent without consideration have been deemed to be a ‘supply’ under the Act and hence made liable to charge of GST.
Schedule I to the Act lists transactions which, even though made without consideration, are deemed to be ‘supply’. Entry no. (3) (the said entry) of the said Schedule I reads as under:
Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such
goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such
goods on behalf of the principal.
It is to be noted that this deeming fiction as per the said entry of Schedule I applies only in respect of supply of ‘goods’ by principal to agent and vice-versa. Thus, the supply of services without consideration is outside the scope of the said entry of Schedule I.
The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular no. 57/31/2018-GST to clarify the provisions of the said entry of Schedule I of the Act.
As per the clarifications in the circular, all principal- agent transactions would not necessarily attract the deeming provisions of the said entry of Schedule I. It is clarified that in order t to qualify to be a deemed supply, the essence of the relationship between principal and agent is existence of the representative character of the agent. In other words, the principal-agent relationship should be such that the agent acts as the representative of the principal while he supplies goods to the customers or receives goods from suppliers. Thus, it is clarified that:
- Where the agent raises bill for further supply of the goods to the
customers in his own name, the agent will be considered to be
representative of the principal. In such cases the agent has the authority to
transfer to the customer the title in the goods involved in such further
supply. Such cases will fall within the ambit of the deeming fiction of the
said entry no. (3) of Schedule I. Thus, supply from the principal to agent
without consideration will be deemed to be ‘supply’ for the purpose of
GST and hence taxable.
If , however, the agent does not raise invoices for such further supplies in his
own name, supplies of goods by principal to agent will not fall within the ambit
of the said entry no.(3) of Schedule I and such supply by the principal to
agent without consideration will not be subject to levy of GST,
- Similarly, where the goods are being procured by the agent in his own name,
to be further supplied to the principal, the supply by agent to the principal will
be subject to levy of GST, even though there is no consideration.
Reproduced below (in italics) are the four illustrations in the said Circular no. 57 on the clarifications given by the CBIC. Along with the illustrations, the aspect of need of registration by the agent under each one of the four representative scenarios has been given in the Circular.
Mr. A appoints Mr. B to procure certain goods from the market. Mr. B identifies various suppliers who can provide the goods as desired by Mr. A, and asks the supplier (Mr. C) to send the goods and issue the invoice directly to Mr. A. In this scenario, Mr. B is only acting as the procurement agent, and has in no way involved himself in the supply or receipt of the goods. Hence, in accordance with the provisions of this Act, Mr.B is not an agent of Mr. A for supply of goods in terms of Schedule I.
Hence, there will be no tax when the goods are supplied by Mr. B to Mr. A.
Registration by the agent-
Clause (vii) of S. 24 of the CGST Act stipulates compulsory registration in the case of agents. The said clause reads as follows:-
(vii) persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise; (are liable for compulsory registration). It is clarified in the said Circular that since in this illustration Mr. B is not to be deemed agent of Mr. A in terms of entry no.3 of Schedule I, Mr. B is not liable for compulsory registration if his turnover is below the threshold limit of rupees 20 lakh.
M/s XYZ, a banking company ,appoints Mr. B (auctioneer) to auction certain goods. The auctioneer arranges for the auction and identifies the potential bidders. The highest bid is accepted and the goods are sold to the highest bidder by M/s XYZ. The invoice for the supply of the goods is issued by M/s XYZ to the successful bidder. In this scenario, the auctioneer is merely providing the
Auctioneering services with no role played in the supply of the goods. Even in this scenario, Mr.B is not an agent of M/s XYZ for the supply of goods in terms of Schedule I.
Hence, there will be no GST payable on supply of goods to by M/s. ZYZ to Mr. B for auctioning.
Registration by the agent-
As in the case of scenario 1 above, Mr. B, not being deemed an agent in terms of the said entry no.3 of Schedule I , will not be liable for compulsory registration.
Mr. A, an artist ,appoints M/s B (auctioneer) to auction his painting. M/s B arranges for the auction and identifies the potential bidders. The highest bid is accepted and the painting is sold to the highest bidder. The invoice for the supply of the painting is issued by M/s B on the behalf of Mr. A but in his own name
and the painting is delivered to the successful bidder. In this scenario, M/s B is not merely providing auctioneering services, but is also supplying the painting on behalf of Mr. A to the bidder, and has the authority to transfer the title of the painting on behalf of Mr. A. This scenario is covered under Schedule I.
GST will be chargeable on supply of paintings by Mr. A to Mr. B for auctioning.
A similar situation can exist in case of supply of goods as well where the C&F agent or commission agent takes possession of the goods from the principal and issues the invoice in his own name. In such cases, the C&F/ commission agent is an agent of the principal for the supply of goods in terms of Schedule I. The disclosure or non-disclosure of the name of the principal is immaterial in such Situations.
GST will be chargeable on supply of goods by the principal to the C&F Agent or Commission Agent.
Registration by the agent-
Since in both the above cases under this scenario Mr. B /the commisssion agent are deemed to be an agent in terms of entry no.(3) of Schedule I. Thus, being agents,they will be liable for compulsory registration under clause (vii) of S. 24, even if their turnover is below the threshold limit of rupees 20 lakh.
Mr A sells agricultural produce by utilizing the services of Mr B who is a commission agent as per the Agricultural Produce Marketing Committee
Act (APMC Act) of the State. Mr. B identifies the buyers and sells the
agricultural produce on behalf of Mr. A for which he charges a commission from Mr. A. As per the APMC Act, the commission agent is a person who buys or sells the agricultural produce on behalf of his principal, or facilitates buying and selling of agricultural produce on behalf of his principal and receives, by way of remuneration, a commission or percentage upon the amount involved in such transaction.
In cases where the invoice is issued by Mr. B to the buyer, the former is an agent covered under Schedule I.
Thus, GST will be chargeable on supply of goods by Mr. A to Mr. B for further supply.
However, in cases where the invoice is issued directly by Mr. A to the buyer, the commission agent (Mr. B) doesn’t fall under the category of agent covered under Schedule I.
Thus, GST will not be chargeable on supply of goods by Mr. A to Mr. B for further supply.
Registration by agent-
It is to be noted that, as per S. 23(1)(a) of the CGST Act, if the agricultural products are not liable to tax or wholly exempt under GST, the agent is not liable for registration, unless he has other activities that are taxable under GST and his turnover is above the threshold limit of rupees 20 lakh.