In the world of commerce, it is common for businesses to engage in transactions where goods or services are exchanged between a principal and an agent. Under the GST system, transactions between a principal and an agent have unique implications that businesses must ensure compliance with the law. These transactions between the principal and agent and vice versa are integral to the functioning of many industries. Understanding such transactions’ legal and tax implications is crucial for both principals and agents.

Value of Supply of Goods Made or Received Through an Agent

When a principal supplies or receives goods through an agent, the transaction is subject to the Goods and Services Tax (GST) law, which governs the determination of the value of supply. The value of supply is the transaction value, which includes the price paid or payable for the goods, along with any applicable taxes and charges. However, if the transaction value cannot be determined, the GST law specifies the valuation rules that must be used. It is important to note that the agent’s commission or any other amount payable to the agent is not included in the value of the supply. To avoid disputes with tax authorities, both the principal and the agent should be aware of and comply with these valuation rules.

Who Is a Principal?

According to Section 1(88) of the Central Goods and Services Tax Act, 2017, the term “principal” refers to a person on whose behalf an agent supplies or receives goods or services. An example of this type of relationship is when a project owner hires a contractor to complete building construction. In this scenario, the project owner is the principal, while the contractor is the agent who performs the work.

Who Is An Agent?

As per Section 1(5) of Goods and Services Tax (GST) law, an “Agent” is defined as a person who carries on the business of supplying or receiving goods or services on behalf of another person. This definition includes various types of agents, such as factors, brokers, commission agents,  auctioneers, and other mercantile agents. In a del credere agency relationship, the agent not only acts as a salesperson or broker but also guarantees the credit extended to the buyer on behalf of the principal.

Any supply of goods or services between a principal and their agent is subject to GST, and the applicable valuation rules determine the correct tax liability. In such transactions, both the agent and the principal are jointly and severally liable to pay the tax on the supply of goods or services. Therefore, businesses need to understand the GST rules regarding the valuation of supplies between principals and agents to avoid any legal complications or penalties.

What Do We Understand By Principal and Agent Relationship?  

A principal-agent relationship is a legal and business relationship in which one person or entity (the principal) hires another person or entity (the agent) to act on their behalf in certain business activities. In this relationship, the principal delegates the authority to the agent to act on their behalf in certain matters, such as negotiating contracts, making sales, or conducting financial transactions.

The agent is responsible for carrying out these activities in the principal’s best interest, and the principal retains overall control and responsibility for the agent’s actions. The agent is typically compensated for their services through a commission or other payment, and a contract or agreement between the principal and the agent typically governs the terms of the relationship. This type of relationship is common in various industries, such as real estate, finance, and sales, and is subject to various legal and regulatory requirements in different jurisdictions.

Branches Of Any Supply Under GST

The two branches of any supply under GST are-

• Consideration: The consideration is not abiding in any transaction and does not drop within the scope of any supply. Specific scenarios are provided in Schedule 1 of the CGST Act. The supply of goods is stated below.

1. Supply of Goods
   1. By a principal to his agent when the agent agrees to provide the items on the principal’s behalf
   2. By an agent to his principal, the agent agrees to accept the products on the principal’s behalf. 

Not all interactions and transactions between a principal and an agent, or vice versa, fall within the specified entry’s scope.

• The provision of services between the principal and the agent, and vice versa, falls beyond the purview of the preceding item and so calls for “consideration” to be considered a provision of services. This would affect the final GST calculation.
• Here we have explained the phrase “supplier or recipient of products on behalf of the principal” that is included in the definition of “agent.”

2. The course of Furtherance of Business

Section 7 of the CGST Act 2017 defines the scope of valuation of supply under GST. According to sub-section (1) clause (a), “supply” refers to any type of exchange of goods or services for money in the course or advancement of business.

In goods and services tax law, the supply of goods, services, and supplies made by the principal to his agent or agent to his principal shall be liable to tax even if any such transaction does not contain any consideration for such supplies. 

Conclusion   

Determining the relationship would address a few questions, such as; whether an invoice for further valuation of the supply of goods on behalf of the principal is issued by the agent or not. Any provision of services from the principal agent and vice versa would fall within the ambit and scope of Schedule 1 of the CGST Act. 

The products will be invoiced in the agent’s name when the agency secures them on the principal’s behalf. The given entry in Schedule 1 of the Central Goods and Services Tax Act of 2017 would apply to the upcoming provision of the above supplies and services by the agent to the principal.