Is GST applicable on the income earned from commission?

There are many aspects of the goods and services tax (GST) that people are unaware of. One such topic is GST on income from commision. So, is GST applicable on such an income? The answer is yes.

“Commission typically refers to income earned by a person arranging a transaction between two parties and earning a percentage of the sales proceeds. The commission earned in such a scenario is taxable under GST as a service at 18%,” Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, told Money9.

GST registration applies to all commission and brokerage income irrespective of the turnover limits of the taxpayer. “Persons who make taxable supplies of goods or services or both on behalf of other taxable persons whether as an agent or not are required to take registration regardless of turnover,” he added.

Commission agent under GST

Under the CGST Act, an agent is defined as a person, including a factor, broker, commission agent, an auctioneer, or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

An agent has been further classified within three categories for GST registration:

-Commission agent: If you’re working as a real estate broker and get a commission of 1% on the sale of every property, then you’ll be identified as a commission agent under the CGST Act.

-Carry & Forwarding Agent: A newspaper company appoints you as a C&F agent to transport newsprint from their printing press to the depot across Uttar Pradesh. The goods are sent by the company to you on issuing an invoice. You may hire some third party to execute the task and issue invoices on your own firm’s name. If you have the authority to pass/receive goods on behalf of the original company, you’re a C&F agent as per CGST Act.

-Pure Agent: A person who makes payment on behalf of another person and takes only reimbursement in relation to that payment is called a pure agent. GST is not applicable to such reimbursements.

As the threshold limit condition for registration does not apply to commission agents, you’re required to obtain GST registration if you fall under the definition of an agent no matter what.

Principal-Agent Liability

When the commission agent/broker supplies any services/goods on behalf of the principal owner, then both are jointly liable to pay the GST on the taxable goods.

“One of the key pointers to identify whether a person is an ‘agent’ or ‘principal supplier’ is to follow the document trail of invoicing. To establish the ‘agency’ requirement, the invoice for the original supply should be raised by the supplier and not by the agent,” Jhunjhunwala pointed.

However, given the complicated nature of transactions for commissioning agents, each contract has to be analyzed separately to establish taxability, he added.

Tax: Before and after GST

Consider Mr. X, a commission agent, who charges Rs 5,000 as his service charges. Now let us see how he would be taxed before and after GST application on his income.

Before GST, the service charges (Rs 5,000) + service tax of 15% (Rs 750) would take the total invoice value to Rs 5,750. But after the new rule, service charge (Rs 5,000) + total GST of 18% (Rs 900) would raise the invoice value to Rs, 5,900. This clearly indicates the increased tax burden on commission agents post GST registration.

“To ensure that only the commission portion of the transaction is taxed at the hands of the commissioning agent and not the entire sales proceeds, the commissioning agent should ensure that he is acting only as an ‘agent’ of the original supplier and not carrying out the supply on a principal-to-principal basis,” Jhunjhunwala said.

Normally, the supplier of goods/services is required to pay GST. However, at times even the recipient of goods/services is required to pay GST. This is known as the reverse charge mechanism. Services provided by a broker or a commission agent to banks and other financial institutions are covered under reverse charge mechanism.

GST compliance 

Any registered commission agent is required to file the below returns under the GST Act:

-GSTR-3B – Monthly summary return.

-GSTR-1 – Return for reporting outward supplies.

-GSTR-9 – Annual return.

-GSTR-5 and GSTR-5A – Non-resident foreign taxpayers.

All agents are required to maintain accounts showing details of authorisation from principal to supply/receive goods on his behalf, quantity and value of goods/services received on behalf of the principal, particulars of accounts furnished to the principal and taxes paid on supply/receipt of goods/services on behalf of the principal.

GST exemptions

There are a few services provided by commission agents that are exempt from GST. This includes the services provided by fair price shops (those licensed to distribute essential commodities by an order issued under section 3 of the Essential Commodities Act, 1955, to the ration card holders under the Targeted Public Distribution System) to the Central Government on sale of rice, wheat, and other coarse grains and to the state government or Union Territories on sale of kerosene, sugar, edible oil, etc.

Apart from this, support services to agriculture, forestry, fishing, and animal husbandry are also exempt from GST. Meanwhile, services under cultivation of plants and rearing of all life stock (except horse), such as the following are also eligible for due exemption:

-Direct agricultural operations

-Farm labour supply services

-Certain agricultural processes like tending, pruning, cutting, harvesting, drying, sun drying, etc.

-Renting/leasing of agro machinery or a vacant land

-Warehousing and storage activities of agricultural produce

-Extended agricultural service

-Services provided by an Agricultural Produce Marketing Committee