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Vishwanath was listening to his son Rahul’s group study session with his friends about principal and agent under Indian Contract Law. After mischievously overhearing the entire discussion, he could understand that agent is a person employed to do any act for another in dealing with third parties. He/she is a person who is authorized to act on behalf of another known as the Principal to create a legal relationship with the third party. An agent has the authority to make decisions or create obligations for the Principal. Principal remunerates the agent for the services rendered. Remuneration is usually known as the commission.
More than the legal form, it is the substance of the relationship between two parties that determines whether it is one of principal and agent. He also understood that representative character and derivative authority are the distinctive features of an agent.
To Vishwanath, the idea of an agent appeared to overlap with the idea of an employee. He also wanted to understand both these words in the context of proposed GST law and therefore decided to have an audience with his guru, Mr Prasanna.
Prasanna started by saying that an employee- employer relationship is usually governed by the Labour-oriented laws while Indian Contract Act governs the relationship between a principal and an agent. An employee at times is treated as an agent. For example, managing director of a company is an agent of the company to the extent that he/she can bind the company with his/her actions and he/she is also an employee of the company. So conceptually both employee and agent can overlap.
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The GST law as such does not define the words like an employee, employer or employment. So these words are given the meaning as is understood in trade and commerce. Following are the situations in which these words are used in GST law:-
Prasanna now tried to explain this using an example.
Kapil is a retailer with a turnover of Rs 15 lacs per annum operating in Bangalore. He wanted to expand his business into nearby districts and therefore appointed Kirmani as his employee designating him as Sales Champion of Mysore and Srikkanth, another employee as Sales Champion of Hosur, Tamil Nadu. Goods were supplied from Bangalore to Mysore and Kirmani was required to sell products. On the other hand, Srikanth was given the task of doing a preliminary market survey in Hosur, Tamil Nadu and no goods were stock transferred to Hosur.
The implications under GST are as follows:-
Turning his attention to Agent, Prasanna listed out the various circumstances in which the word Agent is used in GST law. An agent is defined as a person, including a factor, broker, commission agent, del credere agent, 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. Thus the agent can be a purchasing or a selling agent for goods or services or both.
Prasanna tried to compare and contrast employee and agent under GST by resorting to the earlier example. Kapil is a retailer with a turnover of Rs 15 lacs per annum operating in Bangalore. He wanted to expand his business into nearby districts and therefore appointed Kirmani as his agent designating him as Sales Agent of Mysore and Srikkanth, an employee as Sales Champion of Hosur, Tamil Nadu. Goods were supplied from Bangalore to Mysore and Kirmani was required to sell products. On the other hand, Srikanth was given the task of doing a preliminary market survey in Hosur, Tamil Nadu and no goods were stock transferred to Hosur.
Prasanna forewarned that though situations looked identical in both examples, the implications in the second situation is, to borrow a phrase used by Winston Churchill, a riddle wrapped in an enigma. The implications are as follows:-
Having narrated the implications, Prasanna added that the concept of Agent is the biggest conundrum in GST law.
In many situations, the distinction between employee and agent is so thin that it is like finding the difference between Tweedledum and Tweedledee. An executive director of a company who is an employee of the company in several situations acts as an agent of the company in the eyes of the Law. Is it, therefore, necessary for the company to bifurcate his remuneration paid for his role as an employee and for his role as agent and tax the element pertaining to that of an agent? The answer would depend as to whether the acts of such executive director would fall within the definition of Agent under GST law.
Similarly, a non-executive director who is not an employee of the company renders certain services on the directions of the Board and becomes an agent of the company in the eyes of the law. Will the place of business of such non-executive director be included in the place of business of the company? The crucial issue is whether the acts of the non-executive director would result in him/her falling within the meaning of Agent under GST law.
Prasanna concluded that both agent and employee relationships originate from contracts. A wise businessman must focus on defining and confining the relationships properly and meticulously in the contracts to avoid problems in GST.
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