GST Valuation of Supply for Pure Agents: Key Considerations


Date: 03 Feb 2023

Valuation of Supply Rule Under GST In Case of Pure Agent

Here, we will discuss the final valuation rule, which is the valuation of supply in the case of services to a pure agent, in our series of articles describing the valuation standards established by the GST council.

Who Is Pure Agent

A pure agent is a person who: 

  1. Enters into a contract with the supply receiver to act on their behalf and incur expenses or costs in connection with the provision of products or services, or both;

  2. Neither holds any title to nor plans to hold any interest in the commodities or services (or both) obtained for or given to the recipient of supply;

  3. Does not use the products or services so obtained for his personal benefit.

  4. Receives only the cash that was actually spent on buying the products or services.

Who Is the Principal?

The term "Principal" refers to a person on whose behalf an agent conducts the business of supplying or receiving goods or services or both, according to the definition given in the GST law.

What Does The Valuation Rule Say?

The cost or costs incurred by the supplier as a pure agent (contracted to the recipient of the supply of services) shall be deducted from the value of supply in accordance with the valuation rule if all of the following conditions are satisfied:

  1. The pure agent pays the third party on behalf of the recipient when the contract for the supply of the services obtained is between the third party and the recipient, as in the instance of legal costs paid to the Registrar of Companies (RoC) in the example above.

  2. The sole use of the services obtained by the pure agent from the third party is the recipient of the supply;

  3. The supply's recipient is responsible for paying the third party;

  4. The pure agent is given the recipient's permission to pay for the supply;

  5. The recipient of the supply is aware that the third party is providing the services for which the pure agent has made payment;

  6. The payment paid by the pure agent on behalf of the supply receiver is expressly stated in the invoice generated by the agent.

  7. Only the money that the recipient has paid to the third party is what the pure agent recovers from the recipient.

  8. In addition to the goods and services the pure agent supplies on his own, he often hires third-party workers to perform certain tasks.

Let's Understand This With the Help Of an Example

In order to manage the legal work involved in the incorporation of a business run by Z, corporate services firm X has been hired. Firm X additionally recovers from Z the registration and approval fees for the company name that were paid to the Registrar of Companies in addition to its service fees.

Z must pay the fees determined by the Registrar for the company's registration and approval of the name. In the payment of those fees, X is only acting as an agent. As a result, X's repayment of these expenses is a payment rather than a share of the supply's worth to Z.