GST Regulations for Commission Agents and Brokers in India

The Goods and Services Tax (GST) is levied on the income earned by intermediaries, such as brokers and commission agents, who facilitate buying and selling activities. These services are taxable under Indian GST regulations. This document will discuss how GST applies to commission and brokerage services, including how to claim Input Tax Credit (ITC). Notably, all income from commission and brokerage necessitates GST registration, regardless of the taxpayer's annual turnover.

Defining Brokers and Commission Agents Under GST

Under GST law, an agent is defined as an individual or entity conducting the business of supplying goods or services on behalf of another person (the principal). This definition encompasses brokers, commission agents, factors, auctioneers, and mercantile agents. Their operations establish a clear principal-agent relationship.

GST Applicability for Brokers and Commission Agents

According to Section 7 of the CGST Act, read in conjunction with Schedule I, the supply of goods by a principal to their agent, or by an agent to their principal, where the agent facilitates the supply on behalf of the principal, is subject to GST. This applies even if no direct consideration is involved, provided the transaction is for business purposes.

Determining whether a transaction falls under the agent's definition relies on the existence of a principal-agent relationship, specifically if the agent is supplying or receiving goods on the principal's behalf. A key indicator for this relationship is how the invoice is generated:

• If the invoice is issued in the agent’s name, it is considered a Schedule I transaction and is liable for GST.
• If the invoice is issued in the principal’s name, it is not covered under Schedule I.

The crucial aspect here is whether the agent has the authority to transfer or receive the title of goods on behalf of the principal. Consider these scenarios:

Scenario 1:

Mr. X engages Mr. Y to acquire specific goods. Mr. Y identifies Mr. Z as a supplier and instructs him to deliver the goods directly to Mr. X, with the invoice addressed to Mr. X. In this case, Mr. Y is not directly involved in the supply chain and therefore does not meet the definition of an agent under Schedule I.

However, if Mr. Y takes delivery of goods from Mr. Z on behalf of Mr. X, and Mr. Z invoices Mr. Y, then this transaction aligns with the definition of an agent and constitutes a supply under Schedule I.

Scenario 2:

Mr. A, an auctioneer, is appointed by M/s ABC to auction certain items. Mr. A finds potential buyers and conducts the auction. M/s ABC then issues the goods to the highest bidder, invoicing the bidder directly. Here, Mr. A is not involved in the actual supply of goods and thus does not fall under the Schedule I definition of supply.

Conversely, if Mr. A issues the goods to the highest bidder on behalf of M/s ABC and also generates the invoice in his own name, Mr. A is not only providing auctioneering services but also possesses the authority to transfer the title of goods for M/s ABC. This transaction is therefore covered by the definition of supply under Schedule I.

Tax Comparison: Pre-GST vs. Post-GST

To illustrate the tax implications for commission agents before and after the implementation of GST, consider Mr. A, a commission agent in India, who charges a service fee of Rs. 5,000.

This comparison demonstrates that GST has increased the tax burden on brokers and commission agents.

GST Registration for Brokers and Commission Agents

Any individual or entity meeting the definition of an agent is mandated to obtain GST registration. The standard turnover threshold for registration does not apply to commission agents. Consequently, registration is compulsory once a person is classified as an agent. Non-Resident Taxable Persons (NRTPs) making taxable supplies in India without a fixed place of business or residence in the country can register as an NRTP.

While the composition scheme was initially exclusive to goods suppliers, it now extends to service providers following CGST (Rate) notification no. 2/2019 dated March 7, 2019. This means brokers and commission agents with an annual aggregate turnover up to Rs. 50 lakh are eligible to opt for the composition scheme, thereby reducing their compliance obligations.

However, if an Indian exporter remits commission to a Foreign Commission Agent (FCA), the exporter is not liable for GST. This is because the place of supply is outside India, and the reverse charge mechanism does not apply to Indian exporters in this context.

Invoicing Requirements for Brokers and Commission Agents

Fundamental Requirements: An agent must issue a tax invoice for the supply of their services. For exempt supplies, a Bill of Supply can be issued. The Service Accounting Code (SAC) must be included on the tax invoice based on turnover limits:

• Up to Rs. 5 crore: Four digits are mandatory for B2B tax invoices; optional for B2C tax invoices.
• Greater than Rs. 5 crore: Six digits are mandatory for B2B tax invoices.

e-Way Bill Mandates: A pure agent is required to generate e-way bills if they also function as a transporter and if the consignor/consignee does not issue the e-way invoice themselves.

e-Invoicing Obligations: If an agent's annual turnover in any financial year from FY 2017-18 exceeds the notified threshold, they must comply with the e-invoicing system.

Value of Supply for Brokers and Commission Agents

The method for calculating the value of supply for GST purposes differs for agents based on their role:

As a Sole Agent (Rule 29): When supplying as a sole agent, the value of supply is determined as either:

• The open market value of the goods supplied.
• 90% of the price charged by the recipient to their customer (if not a related person) for goods of a similar kind, where the goods are intended for further supply by the recipient.

As a Pure Agent (Rule 33): A pure agent provides services to a recipient and also incurs expenses on the recipient's behalf for ancillary services. They seek reimbursement for these expenses without adding them to their own supply value. In this arrangement, the service provider and recipient have a principal-to-principal relationship for the primary service, but a pure agent relationship for ancillary services. According to the Valuation Rules of GST, expenses incurred by a pure agent are excluded from the value of supply.

GST Rates for Commission Agents and Brokers

A GST rate of 18% is applicable to the taxable value of supply provided by a commission agent or broker. This includes services such as selling/purchasing advertising space or time. The following services, among others, when provided for a fee, commission, or on a contract basis, fall under this rate:

• Sale of land/building.
• Any retail/wholesale trade service.
• Property management service.
• Real estate appraisal service.
• Commission agent services for negotiating wholesale commercial transactions.

Typically, the supplier of goods or services is responsible for paying GST. However, in certain scenarios, the recipient of goods or services is liable to pay GST under the reverse charge mechanism. Services provided by a broker or commission agent to banks and financial institutions are subject to the reverse charge mechanism.

Input Tax Credit Eligibility for Commission Agents and Brokers

Yes, commission agents and brokers are eligible to claim Input Tax Credit (ITC) on the GST paid for inputs and input services utilized in delivering their output services. This covers business expenses such as office overheads and supplies.

Claiming ITC on Commission Payments

ITC can indeed be claimed on commission payments made to agents, provided the commission is incurred for business purposes and all relevant conditions and requirements under the GST law are satisfied.

GST Exemptions for Brokerage and Commission

The following services, when provided for commission, are exempt from GST:

• Services by fair price shops:
  • To the Central Government for the sale of rice, wheat, and other coarse grains.
  • To the state government or Union Territories for the sale of kerosene, sugar, edible oil, etc.
• Support services for agriculture, forestry, fishing, and animal husbandry.
• Services related to the cultivation of plants and rearing of all livestock (excluding horses), which include:
  • Direct agricultural operations.
  • Supply of farm labor services.
  • Specific agricultural processes like tending, pruning, cutting, harvesting, drying, sun-drying, etc.
  • Renting or leasing of agricultural machinery or vacant land.
  • Warehousing and storage activities for agricultural produce.
  • Extended agricultural services.
  • Services rendered by an Agricultural Produce Marketing Committee.

Principal and Agent Liability Under GST

When an agent supplies goods on behalf of their principal, both the principal and the agent are jointly and severally liable to pay GST on such taxable goods. For instance, if M/s X appoints Mr. Y as an agent to sell its goods, and Mr. Y sells these goods to Mr. Z on behalf of M/s X, then M/s X and Mr. Y share joint and several liability for paying GST on those goods if either party defaults.

GST Compliance for Brokers and Commission Agents

Forms and Returns: Registered brokers and commission agents must file the following returns:

• GSTR-3B – A monthly summary return.
• GSTR-1 – A return for reporting outward supplies.
• GSTR-9 – The annual return.
• GSTR-5 and GSTR-5A – For non-resident foreign taxpayers.

Account Maintenance: All agents are required to keep detailed accounts that show:

• Authorization received from the principal to supply or receive goods on their behalf.
• The quantity and value of goods or services received on the principal's behalf.
• Records of accounts provided to the principal.
• Taxes paid on the supply or receipt of goods or services conducted on the principal's behalf.

Frequently Asked Questions