Scope of GST on commission income

Introduction

As we all know, for an agent or a broker, the commission income is treated as income from business or profession, Section 28 of the Income-tax Act, 1961 deals with the same. For agent this income forms a part of the Profit & Loss account and reported under “revenue from operations” or “other operating income”, depends on business of the person.

As per Accounting Standard 9 (revenue recognition) or Ind AS 115 (revenue from contracts with customers) this income is recognized when the service is performed and there is a right to receive consideration.

Let’s understand it with the accounting entry

Illustration:  Customer pays Rs. 1,00,000, in which agent charges 10% commission.

Entries in agent’s books on receipt of amount:

Bank A/c ....................Dr   1,00,000 

To Principal Payable A/c ........ 90,000 

To Commission Income A/c ....10,000

On remittance to principal:

Principal Payable A/c ........Dr   90,000 

To Bank A/c ................ 90,000

From above entry, it’s clear that only Rs. 10,000 i.e. 10% amount is entered into Profit and loss account of agent

Implications in income tax

Income is taxable under “Profits and Gains of Business or Profession” and the expenses that are incurred exclusively for earning commission like paying salaries, travel, communication, rent etc are deductible as per the section 37(1).

Suppose I went to Delhi for my client meet, I spent Rs. 5,000 for traveling, and I helped the firm say STS Ventures to get a good deal worth 2.5 lakhs, for that it paid me a commission, say for example Rs. 25,000. Now I can claim Rs. 5,000 as deduction and would be paying tax on Rs. 20,000.

Now, coming to our topic, let’s discuss in the context of GST

A client who are pure commission agent, came to me for consultancy and primarily asked me that, whether GST liability as well as the registration threshold should apply to the full transaction amount (i.e. Rs. 2.5 lakhs in STS Venture’s case) or only the commission earned (i.e. Rs. 25,000 which I received)

Now, Circular No. 57/31/2018-GST, issued by CBIC on 4th September 2018, clarified this issue within the framework of Schedule I of the CGST Act, 2017. A subsequent corrigendum (5 November 2018) further refined registration requirements, we will discuss it in detail here.

'Agent' under GST

As per the Indian Contract Act, 1872, an agent as a person appointed to act for another (the principal) in dealings with third parties, but CGST Act, 2017 defines it through Section 2(5), expanding it to include factors, brokers, commission agents, auctioneers, etc., who carry on supply or receipt of goods/services on behalf of another.

Schedule I: deemed supply without consideration

Schedule I treats the movement of goods between principal and agent as a deemed supply, irrespective of any consideration, it covers the supply by principal to agent who undertakes further supply on principal’s behalf and the supply by agent to principal who receives the goods on principal’s behalf.

Determining principal-agent relationship

The core question is “When does an agent fall within the ambit of Schedule I?”

Here, the invoice test is the objective criterion that means if the agent issues invoice in his own name for supply on behalf of principal then in that case Schedule I applies and it would be considered as deemed supply with the GST liability on agent, but if the invoice is issued in the name of the principal, whether by principal or agent then in that case Schedule I does not apply resulting in no deemed supply.

Let’s understand it through illustrations

A procurement agent that is an agent who does not issue invoices in his own name. like, STS Ventures in our above example deals in making DSCs for its clients, but the invoice is raised in favour of Digi-Sign, the principal. In this case, STS is not considered an agent under Schedule I, and the transaction does not qualify as a deemed supply.

In the case of an Auctioneer where the principal issues the invoice, if the agent merely facilitates the auction and the invoice is raised by the principal, Schedule I is not applicable. However, if the agent sells and issues the invoice in his own name, Schedule I becomes applicable, resulting in GST liability and compulsory registration.

Obligation of GST registration

As per Section 24(vii)of the CGST Act, 2017 if a person is making any taxable supply on behalf of another taxable person (an agent under Schedule I) then he must register himself even if turnover thresholds are not met. Corrigendum (dated: 5 November 2018) clarified that two conditions must be satisfied for compulsory registration, first one is the principal must be a taxable person and the second one is the agent’s supply must be taxable.

Receipt of consideration in the agent’s account

Merely receiving the full Rs. 2,50,000 in my bank account does not automatically make me liable for GST on the full amount. What matters is the nature of supply and invoice issuance, not the flow of funds.

If I acted purely as an intermediary (agent to enjoy commission), and Rs. 2.5 lakhs is collected by me on behalf of STS Ventures Rs. 2,25,000 is remitted to STS Ventures, and Rs. 25,000 is retained my me as commission (my supply of service), then, for me the GST will apply only on Rs. 25,000, being my “value of supply” as per Section 15of the CGST Act.

Saying this on the basis of the invoice test, which is the decisive factor as per Circular 57/31/2018 GST, which we had discussed earlier.

The CBIC circular says if an invoice is issued by the principal in his own name, the agent is not treated as a supplier of the goods but if the agent issues an invoice in his own name, then the law deems it as a supply by the agent to the customer, which triggers GST on the full amount.

Therefore, if the agent receives money but invoices are in the principal’s name, then he is only liable on commission income, even though funds flow through his account.

Rulings and circulars clarifying the commission in GST

Circular 57/31/2018-GSTmakes invoice-issuance the test, and not fund flow, secondly the advance rulings confirm that where an agent merely collects money as a conduit, GST is payable on commission only. Let’s discuss two of such rulings in detail:

AAR in Kiran machines

In the case of Kiran machines (AAR Tamil Nadu, 2019), the applicant was engaged in facilitating sales for overseas principals and earned commission income in convertible foreign exchange. The question was whether GST would apply on the entire sale value or only on the commission income, and whether such commission qualified as “export of services.”

The Authority held that the applicant was not supplying goods on his own account but only providing facilitation services. Accordingly, GST was leviable only on the commission amount received. Since the consideration was in foreign exchange and the recipient was located outside India, the supply satisfied the conditions of Section 2(6) of the IGST Act, 2017 and the commission qualified as an export of services, thereby attracting zero-rating under Section 16 of the IGST Act.

AAR in Saraswati agro

In Saraswati agro (AAR Rajasthan, 2019), the assessee acted as a commission agent for the farmers in the sale of agricultural produce. The issue was whether GST would apply to the gross sale proceeds collected on behalf of farmers or only to the commission charged. The AAR clarified that where the agent merely facilitates the sale and the invoice is issued in the principal’s name, the agent is not deemed to supply goods under Schedule I.

Therefore, GST liability arises only on the commission income earned by the agent and not on the gross turnover. Further, as per Notification No. 12/2017–CT (Rate), services by a commission agent for the sale or purchase of agricultural produce are exempt. Hence, the commission earned by such an agent in relation to agricultural produce does not attract GST, providing relief to agricultural facilitators.

Conclusion

As per the Circular No. 57/31/2018-GST and its corrigendum that was issued, the GST is chargeable only on the commission, and not on the full amount received, provided you act as a commission agent and invoice in your own name, also the registration threshold applies based on commission income (not gross), and mandatory registration under Section 24(vii) is required only if your principal is taxable and your commission supply is taxable.

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