This article examines the Goods and Services Tax (GST) valuation rule specifically for services involving a pure agent, as part of our ongoing discussion on GST valuation principles (refer to our other articles here).

Defining a Pure Agent

A 'pure agent' refers to an individual who meets specific criteria:

• They enter a contract with the supply recipient to act on their behalf, incurring expenses or costs during the supply of goods or services.
• They do not intend to hold, nor do they hold, ownership of the goods or services acquired for or provided to the recipient.
• They do not utilize the procured goods or services for their own benefit.
• They only recover the exact amount spent to obtain these goods or services.

For instance, a Chartered Accountant facilitating the incorporation of a private limited company for a client serves as a pure agent in that transaction.

Understanding the Principal Role

Under GST legislation, a 'principal' is defined as the individual or entity on whose behalf an agent conducts business related to the supply or receipt of goods or services.

Key Valuation Rule Principles

The GST valuation rule specifies that any expenses or costs incurred by a supplier acting as a pure agent, under contract with the service recipient, are to be excluded from the total value of supply. This exclusion applies only when the following conditions are met:

• The pure agent pays a third party for a supply on behalf of the recipient, where the primary service contract exists between the third party and the recipient. An example is legal fees paid to the Registrar of Companies (RoC) in the context of company incorporation.
• The service procured by the pure agent from the third party is exclusively used by the supply recipient.
• The recipient of the supply is directly responsible for payment to the third party.
• The recipient explicitly authorizes the pure agent to make this payment on their behalf.
• The recipient is aware that the services paid for by the pure agent are provided by the third party.
• The pure agent's payment on behalf of the recipient is itemized separately in the agent's invoice.
• The pure agent recovers only the exact sum paid to the third party from the recipient.
• The services obtained by the pure agent from the third party are distinct from the primary services the agent provides.

Illustrative Example

Consider a scenario where Corporate Services Firm Alpha is hired by Business Beta to manage the legal aspects of company incorporation. Beyond its own service charges, Firm Alpha also seeks reimbursement from Business Beta for the registration and name approval fees paid to the Registrar of Companies.

Since these Registrar fees for company registration and name approval are mandatory for Business Beta, and Firm Alpha simply facilitates their payment, Firm Alpha is operating as a pure agent in this specific transaction. Consequently, Firm Alpha's recovery of these particular expenses is treated as a disbursement and does not form part of the taxable value of the supply provided by Firm Alpha to Business Beta.