GST is not applicable on reimbursement of salary on behalf of foreign entity- Maharashtra AAR
Under GST, supply is considered a taxable event for charging tax. The liability to pay tax arises at the ‘time of supply of goods or services’. The GST council has fitted over 1300 goods and 500 services under four tax slabs broadly of 5%, 12%, 18% and 28% under GST.
The concept of ‘pure agents’ is important while evaluating taxable services, particularly for tax exemption claims in respect of expense reimbursements and applicable GST. It also has bearing on a supplier’s aggregate turnover when determining the appropriate turnover threshold for tax registration and payment. Thus, where any party intends to act as a pure agent, they must ensure that they meet the relevant conditions.
Whether reimbursement of salary on behalf of foreign entity are pure agent services or not?
The above issue was raised by the applicant in Drs Marine Services Private Limited (GST AAR Maharashtra) before the Maharashtra AAR.
Issue Raised before Authority of Advance Ruling (AAR) Maharashtra:-
Whether GST is applicable on Reimbursement of salary on behalf of foreign entity?
Submissions by Applicant:-
- The applicant is a Crew Recruitment and Placement Agency
- Applicant is involved in selecting and recruiting shipping personnel on behalf of their principal/client who is a Foreign Ship Owner and for which they are charging Administration fees and paying GST on such Administration charges so received.
- The applicant submitted that their principal had requested them for disbursal of salary to the crew members from the applicant’s side, for which the principal would be transferring the sum of total salary to the applicant who in turn will be disbursing the salary to the crew member through banking channels into their respective accounts.
- For this activity, the applicant would be charging/invoicing service charges to the principal and on the said charges they would be discharging their GST liability.
- Applicant had further submitted that the said activity of distributing salaries would be done on behalf of their Foreign Principal & they would not be deducting any charges from the amount of salary received for disbursement.
- Hence, they contended that, the amount so remitted towards disbursal of salary would not be taxable under GST in view of provisions of Rule 33 of the CGST Rules, 2017.
- The applicant submitted that as per Regulation 6 of Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2000 notified vide Notification No. FEMA 10/2000-RB dated May 3, 2000, as amended from time to time, and A.P. (DIR Series) Circular No. 48 dated April 30, 2007, general permission is available to ship managing/crew managing agencies that are rendering services to shipping/airline companies incorporated outside India, to open, hold and maintain non-interest bearing foreign currency account with an AD Category – I bank in India for meeting the local expenses in India of such shipping or airline company.
Observations of AAR Maharashtra
Nature of work carried out by the Applicant
- The question raised by the applicant is connected with their agreement that they have entered with Reefership Marine Services Limited (RMS), situated outside India.
- According to the agreement between the applicant and RMS, the applicant would assist RMS to hire officers of Indian Nationality for their vessels.
- As per the agreement the applicant would assist RMS in the selection of qualified Senior/Junior officers for employment on board vessels as when required by RMS, for which they would be paid a certain fee to cover the administrative costs and mobilization expenses and they would also be paid ‘communication costs’.
Salary Reimbursement of Crew Members
- By an Addendum an amendment was proposed and one of the amendments, submitted by the applicant was that RMS will transfer Salary of Crews to DRS “SFC A/C” (salary for crew account) as a single remittance, and applicant will instruct the bank to disburse the Crew Salary as per list provided by RMS to respective Bank Accounts of Crew Members.
- In the said addendum it is mentioned that a fixed fee of USD 1250 per month will be charged as service charges towards disbursement of salaries inclusive of GST applicable.
- From a reading of the Addendum submitted by the applicant it is clear that the Salary of Crews of RMS will be deposited in the account of the applicant in one go and the same will be transferred from the applicant’s account directly to the bank accounts of the Crews, by the bank, on the directions of the applicant.
- The entire amount received by the applicant from RMS towards salary of crews is disbursed.
- Hence with respect to this transaction it is crystal clear that the applicant is acting as a pure agent of RMS.
- AAR reiterated that the amounts that are to be transferred to this account have to be genuinely in respect of salary of crew as discussed and no other amounts which are not authorized and due as salary can be handled through this account by the applicant.
- AAR found that Rule 33 of the GST Rules would cover these types of transactions.
Provisions of Rule 33 pertaining to Value of supply of services in case of pure agent
1.According to Rule 33, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied:-
i. the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient
ii. the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
iii. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account
2. According to Rule 33, “pure agent” means a person who-
i. enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both
ii. neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply
iii. does not use for his own interest such goods or services so procured; and
iv. receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account
3. From the above provisions of Rule 33 and the facts of the proposed transaction explained by the applicant, AAR found that the applicant will be acting as a pure agent of RMS in as much as the entire amount received by them as Crews’ Salary will be disbursed to the Crew and no amounts from the said receipt will be used by the applicant for his own interest.
4. In fact, for performing as a pure agent they will also be receiving compensation separately in the form of fixed fees to be charged as service charges.
AAR was thus of the opinion that the applicant will not be liable to pay GST on Salary amount received from RMS and disbursed to the Crew. Thus, GST is not applicable on Reimbursement of salary on behalf of foreign entity.