Under the Goods and Services Tax (GST) regime, if you supply goods/services to someone as a pure agent, then its expenditure can be excluded from the value of supply. However, before you learn how this system is implemented, it’s important to know what constitutes as a “Pure Agent” exactly.
Pure Agent Under GST
GST defines a pure agent as someone who:
- Has a contractual agreement with the recipient of the supply to act on their behalf and pay for the costs in the course of supply of good and/or services
- Neither has an intention nor holds any title to the goods and/or services procured on the behalf of the recipient
- Doesn’t use the goods and/or services for their own interest
- Receives the exact amount incurred for procuring the goods and/or services
To take a simple example, let’s say Mr. A wants to buy new IT equipment for their law firm. They ask their friend Mr. B, who has a good understanding of such products and services, to arrange it for them.
Mr. B purchases the equipment and provides the same to Mr. A along with the bill. In this arrangement, Mr. B bought goods on the behalf of Mr. A, which is why Mr. B will be considered as a “pure agent”.
“Principal” and Validation Rule
GST defines “principal” as the person/party on whose behalf a pure agent procures goods and/or services.
As a pure agent, you can exclude the costs made on the behalf of the “principal”. However, this has to be done under the valuation rule which states that the following conditions must be satisfied first:
- You have made a payment to a third party on the behalf of the “principal”
- The “principal” is the only person to use the services procured by you
- The “principal” is liable to make a payment to the third party from which the services/goods have been procured
- The “principal” is aware that the supply is provided by the third party
- You have indicated the payment you have made on the “principal’s” behalf in the invoice separately
- You have recovered the exact amount you paid to the third party
- The services procured from the third party are in addition to those provided by you on your own
Pure Agent Value Calculation
The best way to understand how pure agent value is calculated through a real-life example.
Example: Kumar Enterprises is an IT company that provides software solutions to other businesses. One of their products gets tangled up in red tape in a case of copyright infringement. To solve the problem, it approaches a law firm named APC.
APC offers to help at a flat fee of Rs. 60,000. However, as they started working on the case, they had to pay Rs. 5,000 as registration fee for the involved product of Kumar Enterprises from their own pocket. They also had to travel to Delhi from Mumbai for case-related purposes, that set them back by another Rs. 5,000. However, both expenses were approved by Kumar Enterprises and promised to be reimbursed by them as well.
After the case was solved, APC sent an invoice of Rs. 70,000 (60,000+5,000+5,000) to Kumar Enterprises. Now, while Kumar Enterprises will pay the full amount i.e. Rs. 70,000 to APC, they will need to pay GST to the government only on Rs. 60,000 and not the remaining 10,000 as this amount is pure agent value, i.e. expenses incurred by APC on their behalf.
Note: To be eligible for excluding the pure agent value from the total value of supply, the conditions of the validation rule (given above) must be met.