Reimbursements are common in service contracts, particularly in audits, consulting, and advisory engagements. Professionals often incur expenses on behalf of clients which are reimbursed later. While such reimbursements are not treated as income under income tax law, GST law has a different perspective.
In this article, we break down the GST implications on reimbursements, the distinction between incidental and pure agent expenses, and the right way to handle them in your invoices and accounts.
Table of Contents
- What Are Reimbursements in Business Transactions
- GST Law: Why Reimbursements May Be Taxable
- Section 15: Inclusion of Incidental Expenses in Taxable Value
- Pure Agent Concept Under Rule 33 of CGST Rules
- Checklist to Qualify as a Pure Agent
- Practical Examples: Included vs Excluded from GST
- Income Tax and Accounting Treatment of Reimbursements
- Conclusion
- FAQs on GST Applicability on Reimbursements
1. What Are Reimbursements in Business Transactions
Reimbursements occur when a service provider incurs an expense on behalf of the client and later recovers the exact amount without any profit element. Common examples include:
- ROC filing fees
- Advance income tax or TDS paid
- Travel and accommodation during audits
- Courier charges for documentation
From an income tax perspective, such reimbursements are not treated as income. However, under GST, the situation is more nuanced and depends on the nature of the expense and whether the service provider qualifies as a pure agent.
2. GST Law: Why Reimbursements May Be Taxable
According to Section 15(2)(c) of the CGST Act, the value of supply includes:
“Any incidental expenses charged by the supplier to the recipient of the supply at the time of, or before, delivery of goods or services.”
This means that if the expense is linked to the supply of service and incurred in the process of delivering that service, it becomes part of the taxable value.
So, unless a reimbursement qualifies under the pure agent category (explained below), it is liable for GST.
3. Section 15: Inclusion of Incidental Expenses in Taxable Value
If the service provider incurs costs such as travel, lodging, or courier expenses while delivering the service, and later claims reimbursement, GST applies to those expenses.
These expenses are viewed as incidental to the main supply and must be included in the value of supply. GST is levied on the total invoice amount, including such expenses.
For example, if an audit firm charges Rs. 50,000 as audit fee and Rs. 10,000 for travel and stay, then GST is applicable on Rs. 60,000.
4. Pure Agent Concept Under Rule 33 of CGST Rules
The CGST Rules carve out an exception through the pure agent concept.
Rule 33 allows for exclusion of certain reimbursed expenses from the value of supply if the service provider acts as a pure agent of the client.
Conditions under Rule 33 include:
- The service provider makes the payment on behalf of the client with their prior authorisation.
- The actual amount is separately mentioned in the invoice.
- The service provider does not hold any title to the goods or services procured.
- The expense is in addition to the primary supply of service.
Only if all these conditions are met, the amount reimbursed is excluded from GST.
5. Checklist to Qualify as a Pure Agent
To ensure reimbursements are excluded from GST, the following must be in place:
| Criteria | Explanation |
|---|---|
| Contractual agreement | The engagement letter should explicitly authorise the service provider to make specific payments on behalf of the client. |
| Separate disclosure | The reimbursed expense must be shown separately in the invoice without any markup. |
| Invoicing and title | The original invoice for the expense (e.g., ROC fees) must be in the client’s name, not the service provider’s. |
| No personal benefit | The service provider must not derive any personal use or gain from the reimbursed item or service. |
Failure to meet even one of these conditions would disqualify the transaction from the pure agent exclusion and attract GST.
6. Practical Examples: Included vs Excluded from GST
Example 1: Pure Agent – GST Not Applicable
A legal consultant is appointed for incorporation services. He incurs:
- ROC Filing Fees – Rs. 4,500
- PAN Application Fees – Rs. 120
These were paid on the client’s behalf, with prior authorisation, and invoices are in the client’s name. The consultant includes them in the bill without markup.
GST implication: Since all conditions under Rule 33 are met, these amounts are excluded from taxable value.
Example 2: Incidental Expenses – GST Applicable
An audit firm raises an invoice as below:
- Professional Fees – Rs. 75,000
- Travel and Stay – Rs. 15,000
The hotel bills are in the firm’s name. No client authorisation was taken in advance.
GST implication: These are incidental expenses linked to the audit engagement. GST applies on the full Rs. 90,000.
Example 3: Mixed Case – Customs Broker
A Customs Broker bills a client as follows:
| Component | Amount | GST Applicability |
|---|---|---|
| Brokerage Charges | Rs. 12,000 | GST applicable |
| Travel & Lodging | Rs. 8,000 | GST applicable |
| Customs Duty | Rs. 55,000 | No GST |
| Dock Dues | Rs. 4,000 | No GST |
Only statutory payments like customs duty or dock dues are excluded under the pure agent principle, subject to conditions. Travel and lodging, being incidental, are taxable.
7. Income Tax and Accounting Treatment of Reimbursements
Under income tax law:
- Pure reimbursements (no profit element) are not considered income and are not taxed.
- Incidental reimbursements, if included in total invoice value and subject to GST, are treated as income.
Suggested Accounting Treatment:
- Recognise incidental reimbursements as part of professional receipts or as a separate income head in the profit and loss account.
- Record the corresponding expenses (e.g., travel, stay) separately.
- Ensure appropriate TDS is deducted on gross invoice value, if applicable.
- Maintain all supporting documents for GST and income tax reconciliation.
This treatment ensures alignment across GST, income tax, and books of accounts, making audits smoother.
8. Conclusion
Not all reimbursements are automatically excluded from GST. Only those that meet the stringent criteria of a pure agent under Rule 33 can be excluded.
Where reimbursements are in connection with service delivery and do not qualify under the pure agent test, GST must be charged on the total invoice including reimbursements.
Businesses and professionals should:
- Review their contracts and engagement letters,
- Maintain separate billing for reimbursements,
- Collect invoices in the client’s name wherever applicable, and
- Keep proper documentation to justify GST treatment during audits.
9. FAQs on GST Applicability on Reimbursements
Q1. Are reimbursements always outside the scope of GST?
No. Only if the conditions under Rule 33 (pure agent) are met, reimbursements are excluded. Otherwise, they are taxable.
Q2. Is GST applicable on ROC or government fees reimbursed by the client?
No, if the provider acts as a pure agent, with prior authorisation, and shows the amount separately in the invoice.
Q3. Can I exclude hotel and travel expenses from GST if reimbursed by the client?
Only if these expenses were authorised in advance, billed in the client’s name, and qualify under Rule 33. Otherwise, GST must be charged.
Q4. Should reimbursed expenses be shown in income in the P&L?
Yes, if GST is charged. It’s best to disclose it under a separate head and match it with the corresponding expenses.
Q5. What documentation should I maintain to justify non-applicability of GST on reimbursements?
Maintain the engagement letter, original third-party invoices in client’s name, and separate disclosure in the invoice raised to the client.
For more practical GST insights and real-world tax guidance, keep reading Stox N Tax — your one-stop hub for compliance and clarity.
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