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Understanding an Agent and an Employee in GST

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.

Employee under GST

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:-

  1. Employer and employee are considered as related persons.
  2. GST in respect of input services such as rent-a-cab, life insurance and health insurance relating to employees can be availed by the employer only if there is an obligation imposed by any other law to do so.
  3. Input tax credit relating to travel benefits provided to the employee on vacation is ineligible for the employer.
  4. Supply of goods or services by the employer to an employee without consideration will not be taxed subject to a limit of Rs 50,000/- per annum.
  5. Services by an employee to employee in the course of or in relation to employment shall not be subject to GST as it will be neither supply of goods nor services.

Implications

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:-

  1. Kapil as such is not required to register since his turnover is less than the threshold of Rs 20 lacs. As and when he decides to start inter-state supply of goods, he will be required to register even if his turnover is less than the threshold.
  2. The services rendered by Kirmani and Srikanth will not be subject to GST.
  3. Kapil will not be eligible to take input tax credit if he takes any health insurance for the two employees if there is no legal requirement to do so.
  4. Kapil can bestow gifts up to Rs 50,000 per annum per employee on both Kirmani and Srikanth without being subject to GST.

Agent under GST

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.

  1. Output tax for a taxpayer would include tax payable on the goods or services or both supplied by the agent.
  2. Place of business for a taxpayer would include the place where the agent operates on his behalf.
  3. The words supplier and recipient would cover an agent acting as such on behalf of another.
  4. An agent who makes a taxable supply of goods or services on behalf of another taxable person is required to be registered under GST irrespective of his turnover.
  5. Both Principal and agent shall be jointly and severally liable for paying tax in respect of supplies effected by the agent on behalf of the principal. In simple words, the tax can be recovered from either of them or from both of them.
  6. Supply of goods by a principal to his agent for effecting further supply on his behalf or vice versa post receipt of goods by an agent on behalf of the principal without consideration would be a taxable supply.

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Implications

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:-

  1. Kapil as such is not required to register since his turnover is less than the threshold of Rs 20 lacs. As and when he decides to start inter-state supply of goods, he will be required to register even if his turnover is less than the threshold.
  2. As per Section 24 of the CGST law, persons who make a taxable supply of goods or services or both on behalf of another taxable person whether as an agent or otherwise is required to be registered irrespective of turnover. One view would be that Kirmani is required to be registered as he makes taxable supply on behalf of another taxable person. The confusion is confounded if you read the definition of taxable person.
  3. Taxable person is defined as one who is liable to be registered either as per the threshold criterion or under Section 24. Therefore, Kirmani may not be required to be registered as long as Kapil either does not cross the turnover of Rs 20 lacs or does not make an inter-state supply. Is it fair to cast a duty of registration on Kirmani contingent on the action of Kapil of making an interstate supply?
  4. Assuming Kirmani is operating as a sales agent for others and therefore registered, will Kapil be required to get registered?
  5. Kapil as and when he becomes liable to registration is required to include Kirmani place of business and is also liable to pay tax on the supplies effected by Kirmani.
  6. Kapil and Kirmani can be proceeded against together or separately if there is default in paying tax on supplies made by Kirmani.
  7. The services rendered by Srikanth will not be subject to GST as being that of an employee. The services rendered by Kirmani will be taxable under GST.
  8. Kapil will not be eligible to take input tax credit if he takes any health insurance for Srikanth if there is no legal requirement to do so. However, health insurance taken for Kirmani will be eligible for input tax credit.
  9. Kapil can bestow gift up to Rs 50,000 per annum on Srikanth without being subject to GST. However, any gift to Kirmani will be a supply subject to GST.
  10. Once Kapil becomes liable to GST, the supply of goods by Kapil to Kirmani for further supply will be treated as taxable supply from principal to agent and tax will be levied as per valuation rules.

Agent Conundrum in GST Law

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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