The Goods and Services Tax regime, introduced in India to unify indirect taxation, has faced its share of interpretational challenges. One such persistent area of confusion is the GST treatment on reimbursements. The recent CBIC circular tried to clarify the issue of GST on the reimbursement of electricity expenses, but rather than resolving concerns, it has sparked further debate.
The issue primarily concerns whether a supplier who recovers costs from the recipient should add GST on such amounts. This becomes more complex when the original service or goods, like electricity, is exempt, but the context in which it’s reimbursed may lead to a different GST treatment. Understanding the key legal provisions, rules on valuation, and concepts like pure agent and composite supply is essential to analyzing whether GST applies to a reimbursed expense.
GST Legal Framework for Reimbursements
Section 15 of the CGST Act governs valuation rules for supplies. It specifies that the value of a supply includes incidental expenses and amounts charged for anything done by the supplier before or at the time of delivery. These expenses can include transportation, handling, or packaging, even if billed separately.
However, Rule 33 of the CGST Rules introduces an exception. If a supplier acts as a pure agent of the recipient while incurring expenses, such reimbursements can be excluded from the value of the supply. But this exclusion is conditional. The rule specifies that:
Conditions under Rule 33
- The supplier must incur the expenditure on behalf of the recipient
- The recipient must be liable to make the payment
- The payment must be separately indicated
- The supplier must not use the goods or services for their own benefit
All seven conditions listed under Rule 33 must be met for the exclusion to apply. If even one fails, the reimbursement becomes taxable.
Understanding the Concept of Pure Agency
The pure agent mechanism is designed for intermediary-type relationships. For instance, a consultant booking flight tickets for a client may recover ticket costs without GST if they qualify as a pure agent.
The concept becomes problematic in scenarios like landlords recovering electricity charges. While electricity is an exempt supply under GST, if it is supplied in conjunction with taxable services like renting, it can be seen as part of a composite supply. Then, the entire amount, including electricity charges, can attract GST. Hence, the real test is to examine whether the expense is incurred as a pure agent or bundled with the main supply. The latter often renders the entire transaction taxable.
Composite and Mixed Supplies
Section 2(30) defines composite supply as two or more supplies bundled together naturally in the ordinary course of business, with one being the principal supply. For example, a landlord supplying office space and electricity together may be seen as offering a composite supply where renting is the principal supply.
If a transaction qualifies as a composite supply, GST is applied based on the principal supply. Thus, even exempt or lower-rated components may get taxed at the higher rate applicable to the principal supply.
This is distinct from mixed supply, where unrelated goods or services are bundled, and the highest rate among them applies. The challenge lies in classification. Courts and authorities have differed on whether certain reimbursements form part of a composite or standalone supply.
Judicial Interpretations and Their Impact
Indian jurisprudence offers varying interpretations on the applicability of GST to reimbursements. In some cases, reimbursements are taxed as part of incidental expenses, while in others they are considered disbursements outside the scope of GST.
Case 1: Indiana Engineering Works (Bombay) (P.) Ltd. [2022]
The applicant leased out a building where the main electricity meter remained in the applicant’s name. Charges for electricity were reimbursed at actual cost by lessees, based on readings from sub-meters. The authority ruled that electricity supply is incidental to the lease and, therefore, taxable. The applicant was not considered a pure agent as the services were not procured under instructions from the lessees.
Case 2: E-Square Leisure (P.) Ltd. [2019]
A property was rented along with DG-powered electricity and water. Charges were recovered based on sub-meter readings. The authority held that utilities formed part of a composite supply and were taxable as ancillary components. Pure agent conditions were not satisfied.
Case 3: NCC Urban One Apartment Owners Co-op. Society Ltd. [2023]
The society collected monthly maintenance that included electricity for common areas. Charges were allocated proportionately based on the carpet area. The ruling considered the society a pure agent under Rule 33 and excluded the charges from GST, since electricity is exempt and cannot form part of a composite supply with taxable services.
Role of Invoicing and Separate Billing
Whether a reimbursement is taxed may also depend on how it is an invoice. If a supplier raises a single consolidated invoice, courts have found it more likely to be a composite supply. However, even separately invoice reimbursements have been held to be taxable, especially if bundled naturally with a taxable service.
The CBIC’s earlier clarification on car servicing stated that if goods and services are separately mentioned in the invoice, then they attract their respective rates. But the new circular appears to override this logic by stating that electricity reimbursements are part of a composite supply even if separately billed. This apparent contradiction in circulars adds to taxpayer uncertainty.
Background and Purpose of the Circular
The CBIC Circular No. 206/18/2023-GST, issued on October 17, 2023, was intended to clarify the GST implications on reimbursements, particularly concerning electricity and diesel charges recovered by landlords and lessors from tenants. The circular attempts to address ongoing litigation and inconsistent practices regarding whether such reimbursements are taxable.
It affirms that when electricity or diesel charges are recovered as part of a lease agreement, such reimbursements form a component of the composite supply of renting and hence, are taxable. However, this position has sparked extensive debate among tax professionals, especially because electricity is specifically exempt from GST when supplied by a distribution utility.
Key Provisions of the Circular
The circular outlines two primary scenarios involving landlords:
Case 1 – Reimbursement of Electricity Charges
According to the circular, when a lessor supplies electricity through their own infrastructure and recovers the cost from the lessee, it should be considered as part of the composite supply of renting. This interpretation implies that GST will apply to the full consideration received, including electricity charges.
This holds even if the landlord raises separate invoices or passes on the cost at actuals. The circular emphasizes that since electricity is not supplied by a registered distribution licensee, the exemption under GST laws does not apply.
H2: Case 2 – Diesel Charges for DG Set Usage
In situations where diesel is used to generate backup power and costs are recovered from tenants, the CBIC has taken the view that such recoveries also form part of the composite supply. Hence, they attract GST at the same rate as the renting service.
Again, the key argument is that diesel is not supplied as a standalone commodity but as part of a bundled supply of renting and electricity provision.
Implications for Businesses and Property Owners
The circular has wide-ranging implications for commercial and residential property owners, facility managers, and real estate leasing companies. Many have traditionally passed on actual utility expenses without applying GST, considering these to be reimbursements not forming part of the rental value.
However, under the new interpretation, these costs will be considered part of the taxable value of the lease unless the transaction qualifies under Rule 33 as a pure agent. This may increase the cost burden for tenants and impact commercial leasing structures.
Administrative and Compliance Burden
Landlords must now segregate taxable and non-taxable components, modify billing software, and ensure all such reimbursements are included in their GST returns. This complicates compliance, particularly for small landlords or cooperative societies not well-versed in GST mechanics.
Moreover, failure to account for such reimbursements could invite audit objections, penalties, or notices for short payment of GST.
Impact on Leasing Contracts
Many existing contracts may not have anticipated GST on reimbursements. Landlords now face the dilemma of absorbing the tax cost or renegotiating terms with tenants to recover it. This could trigger disputes or calls for revision in rent agreements.
Where electricity bills are reimbursed based on sub-meter readings, disputes may arise about whether the landlord is acting merely as a conduit or as part of the supply chain.
Pure Agent Exception Under Rule 33 – Still a Valid Route?
Though the circular is silent on Rule 33, this rule continues to offer a route for claiming exemption on reimbursements. However, the threshold to meet all conditions is high. Unless the landlord can prove they are acting on behalf of the tenant, and the tenant is the actual recipient of the electricity or diesel supply, the reimbursement is unlikely to qualify.
This again leads to interpretational issues. For example, if the utility meter is in the name of the landlord, but the actual consumption is by the tenant, can it be argued that the landlord is a pure agent? Courts have delivered inconsistent verdicts in similar cases, so clarity remains elusive.
Documentary Proof and Separate Billing
To claim exclusion under Rule 33, landlords must:
- Ensure that utility invoices mention the tenant as the consumer
- Maintain contractual documentation stating that such costs are recoverable on behalf of the tenant
- Raise separate invoices for reimbursements
Even with such precautions, the final outcome depends on whether the authorities consider the landlord to have passed the pure agency test in spirit and form.
Apparent Contradictions with Earlier Clarifications
The CBIC had earlier stated in a different context that if goods or services are distinctly billed, each attracts its respective GST rate. That interpretation seemed to support separate treatment of reimbursed items. However, the new circular deviates from that position by treating electricity and diesel charges as inseparable from renting services.
This contradiction has triggered criticism that the circular oversteps the law and attempts to rewrite the valuation rules without a corresponding statutory amendment. The broader legal community is watching how courts will interpret this stance.
Industry Reaction and Representation
Several industry associations have raised concerns that the circular will lead to unnecessary litigation and increase the cost of doing business. They argue that the mere fact that a landlord pays a utility bill on behalf of a tenant should not render it taxable if it is a pass-through cost.
There are calls for CBIC to revisit the circular and issue further clarification or revise it to exclude pure reimbursements explicitly backed by documentation and separate invoicing.
Commercial Leasing Sector Impact
The circular particularly impacts the commercial leasing sector, where electricity usage is often sub-metered, and diesel generators are common in IT parks, malls, and industrial zones. Many landlords now face the risk of tax demands on past transactions.
It also discourages transparency and good practices. If landlords fear taxation, they may resort to inflating rent amounts and avoid detailing reimbursements, defeating the spirit of GST compliance.
Judicial Review – Likely Challenges to the Circular
Legal experts believe the circular is susceptible to constitutional and statutory challenge. Key grounds include:
- Violation of the principle that delegated legislation cannot override statutory provisions
- Ignoring Rule 33 and valuation framework under Section 15
- Mischaracterizing independent reimbursements as composite supply without evaluating the facts of each case
Courts have previously struck down circulars that contradict the statute or impose new obligations not supported by law.
For example, in the case of Intercontinental Consultants and Technocrats Pvt. Ltd., the Supreme Court held that the valuation rules under service tax could not include reimbursements unless the law explicitly allowed it. This precedent could apply under GST as well.
Best Practices for Taxpayers Going Forward
Until there is judicial clarity or further clarification from CBIC, businesses should adopt the following precautions:
- Clearly define the treatment of reimbursable items in lease agreements
- Maintain separate invoices and documentation for utilities
- Ensure transparency in utility consumption and billing patterns
- Assess the feasibility of meeting Rule 33 conditions
- Consider revising rent structures to include all charges if tax risk is high
Tenants should also review their contracts and seek appropriate legal advice to avoid disputes or tax surprises.
Ongoing and Anticipated Litigation
The new CBIC circular has already prompted discussions among litigators and may result in constitutional challenges. Businesses affected by retrospective tax demands may seek relief through writ petitions, claiming the circular changes the law without proper authority.
Courts may be asked to determine whether the CBIC has the power to reinterpret statutory provisions or whether such changes require amendments to the CGST Act or Rules. The issue of whether the circular contradicts prior jurisprudence and violates Article 14 (equality before law) may also come up.
Litigation is likely to arise in the following contexts:
- Reimbursements under joint development agreements
- Commercial leasing arrangements with shared services
- Shared utility and maintenance contracts in residential complexes
- Cases where parties had previously received favorable advance rulings
The outcome of such cases will determine the future scope and application of the circular.
Burden of Proof on Taxpayers
Taxpayers now bear the burden to prove that a reimbursement falls outside the scope of supply. This involves maintaining:
- Separate contracts for principal and ancillary services
- Clear documentation to establish the pure agent relationship
- Utility bills in the name of the actual consumer
- Corresponding pass-through entries in the books of accounts
Any failure to maintain this documentation may result in denial of exemption and demand for GST.
Need for Legislative Clarification
The complexity of the issue signals the need for legislative or rule-based clarification. CBIC circulars serve only as interpretative tools and cannot override the statutory text or judicial interpretation.
To bring clarity, the government could consider amending Rule 33 or introducing specific rules for commonly disputed categories of reimbursements, such as utilities and shared services. This would help resolve ambiguity and reduce the number of disputes. Moreover, issuing a consolidated clarification or FAQ on GST treatment of reimbursements across sectors can help reduce interpretational discrepancies.
Changes in Business Practices
The risk of GST exposure may push businesses to adopt new structures, including:
- Direct billing of utilities in the name of the actual consumer
- Entering tri-partite agreements with vendors, clients, and intermediaries
- Outsourcing reimbursement management to independent third parties
- Revisiting GST classification of bundled services
These steps will entail additional legal and administrative costs but may become essential to mitigate litigation risk.
Compliance Measures and Documentation Best Practices
To manage the new risks, businesses should strengthen documentation and reporting standards:
- Clearly distinguish pure agency transactions in books
- Obtain declarations from recipients of services
- Use separate invoice templates for reimbursement and service fees
- Monitor updates to circulars, advance rulings, and court decisions
In the absence of such compliance, tax authorities may raise objections during audits or assessments.
Judicial Precedents on Reimbursement and GST
Supreme Court Perspective on Reimbursement Principles
The Supreme Court has consistently held that reimbursement, when not part of the consideration for a service, should not attract service tax. These precedents, though from the pre-GST regime, continue to have interpretive value in understanding GST’s scope.
In the landmark decision of Intercontinental Consultants and Technocrats Pvt. Ltd., the apex court ruled that reimbursements could not be included in the value of services for service tax purposes unless expressly provided for. This principle, rooted in the requirement for a direct nexus between consideration and service, can be argued to extend to GST valuation mechanisms under Section 15 of the CGST Act.
High Court and Tribunal Judgments in GST Era
Several High Courts and GST appellate authorities have interpreted reimbursements in specific factual matrices. For example, in cases involving manpower supply or facility management, where the service provider procured third-party services and passed the cost to the client, the courts examined whether such reimbursements had a mark-up or were part of a bundled supply.
In many cases, it was observed that where actual costs were passed without any margin and where sufficient documentation was available, the demand for GST on reimbursements was set aside. However, these rulings are fact-intensive and do not provide blanket immunity to all reimbursement transactions.
Advance Rulings: Divergent Views on GST Applicability
AAR Rulings Creating Uncertainty
The Authority for Advance Rulings (AAR) in various states has delivered conflicting decisions on the taxability of reimbursements. For instance:
- In the case of M/s. Midco Ltd., the Maharashtra AAR ruled that reimbursements form part of the value of supply and are thus taxable.
- Conversely, in the ruling for M/s. Maharashtra State Power Generation Co. Ltd., the AAR held that mere reimbursement of electricity charges by tenants to the landlord, where the latter did not earn any profit, did not attract GST.
These divergent views contribute to legal uncertainty, making it difficult for taxpayers to adopt a uniform position.
AAAR (Appellate AAR) Clarifications
In a few cases, the Appellate Authorities for Advance Ruling have overturned AAR decisions, offering clarity. They have emphasized that for reimbursement to be excluded from taxable value, three conditions must be met:
- It should be incurred by the supplier as a pure agent.
- The recipient should be the ultimate beneficiary of the expense.
- The expense should be separately indicated on the invoice.
These rulings reaffirm the importance of fulfilling the pure agent conditions under Rule 33 of the CGST Rules.
Departmental Clarifications
GST Flyers and CBIC Educational Material
The CBIC, in its educational flyers released during the initial phase of GST rollout, had clarified that not all reimbursements are exempt from GST. However, the lack of binding effect of these clarifications meant that field officers often initiated investigations even when reimbursements were transparently documented.
The circular issued in 2023 attempts to codify some of these positions but also introduces new interpretive challenges.
Industry-Specific Concerns
IT and ITeS Sector
The IT sector frequently passes expenses like domain registration, software licenses, and hosting fees to clients. Whether such pass-through charges are taxable has become a grey area.
Many IT firms now face increased compliance obligations, especially in the absence of clear invoicing protocols. Some companies have even chosen to absorb the tax or restructure their contracts to avoid disputes, which affects their profit margins and long-term pricing strategies.
Real Estate and Facility Management
Developers and property managers often incur maintenance and utility charges on behalf of apartment owners or tenants. The treatment of such reimbursements under GST has seen varied departmental interpretations. Even when the payment is made on an actual basis and backed by third-party invoices, tax authorities have sometimes demanded GST on the total amount recovered.
Event Management and Consultancy
Professional service firms that operate with cost-plus or retainer models often include disbursements for hotel, travel, printing, and courier costs.
Unless these costs are distinctly shown and reimbursed on actual basis without markup, they may be considered part of the taxable value. In many cases, even where these conditions are met, firms have received notices demanding tax, placing the onus on them to defend their position with voluminous documentation.
Emerging Compliance Trends
Shift to Lump-Sum Contracting
Due to the litigation risk associated with reimbursements, many service providers have moved to all-inclusive contracts. While this simplifies tax compliance, it also reduces pricing transparency and could create commercial disputes over the nature of recoverable costs.
Internal SOPs for Reimbursement Documentation
Organizations are developing internal policies that include:
- Reimbursement claim formats
- Mandatory third-party invoice copies
- Separate ledger treatment in books
- Explicit contract clauses recognizing pure agent status
These measures, though administrative in nature, are increasingly becoming essential to manage GST risks.
Professional Opinions and Representation
Representation by Industry Associations
Several industry bodies have made representations to the GST Council and CBIC, seeking a broader exclusion for reimbursements from the scope of taxable value, especially where the service provider acts as a conduit without economic benefit.
However, policymakers are reluctant to expand the exclusion due to concerns over revenue leakage and misclassification. The focus remains on narrowly interpreting exclusions, thereby leaving it to the taxpayers to structure contracts and documentation defensively.
Professional Advisory Trends
Tax consultants now recommend that clients take a cautious approach:
- Avoid reimbursement models where pure agent conditions cannot be met.
- Obtain legal opinions or AAR rulings in high-value or recurring cases.
- Maintain robust documentation and electronic trails for every expense incurred on client’s behalf.
Challenges in Refund Claims and Reversal
Denial of ITC and its Impact
Where taxpayers reverse input tax credit (ITC) on reimbursed expenses due to disputes or notices, it affects their working capital. Moreover, refund claims for taxes paid on reimbursements often get rejected unless it is clearly established that the tax was paid under protest or due to departmental insistence.
Time Barred Refunds and Interest Implications
In some cases, taxpayers have realized that they paid tax on reimbursements erroneously only after departmental scrutiny. Seeking refunds beyond the time limit of two years from the date of tax payment often becomes futile.
Additionally, any delayed payments or reversal of ITC could attract interest and penalty under Sections 50 and 73/74 of the CGST Act, respectively.
Recommendations from Judicial and Advisory Forums
Uniform Guidelines for Reimbursement Transactions
Legal experts have suggested that a separate guideline or amendment under the GST law be introduced, clearly classifying what constitutes a reimbursement outside the scope of supply. This can bring certainty and reduce unnecessary litigation.
It is also proposed that industry-specific illustrations be notified via circular, such as travel reimbursements for consultants or electricity charges collected by housing societies, to eliminate ambiguity.
Expansion of Pure Agent Concept
Some advisory forums advocate for an expanded definition of pure agent that includes practical realities of outsourcing, shared services, and cross-border consulting. The current test is considered too rigid for modern business practices.
Until such legislative amendments are made, however, taxpayers must continue to rely on conservative interpretations and ensure absolute documentary compliance.
Conclusion
The GST implications on reimbursements, especially in light of CBIC Circular No. 206/18/2023-GST dated 31 October 2023, have clarified certain ambiguities but also opened new areas of interpretative challenge. The overarching intent of the circular appears to be to plug revenue leakages arising from unjustified exclusions of reimbursed amounts from taxable value. However, this shift has complicated long-standing practices that relied on clear contractual segregation and the “pure agent” principle to justify non-inclusion.
From a statutory standpoint, the CGST Act permits inclusion of incidental expenses, including reimbursements, in the transaction value unless conditions for exclusion such as acting as a pure agent are strictly met. The circular reiterates this by emphasizing substance over form: merely labeling an expense as reimbursement does not exempt it from tax. The emphasis now lies on demonstrable contractual arrangements, actual payments on behalf of the recipient, and absence of any markup or value addition.
For taxpayers and businesses, this entails a rigorous review of contracts, invoicing structures, and internal documentation. Entities must reassess whether their reimbursement models genuinely reflect agency relationships or are mere pass-throughs cloaked in contractual terms. Professionals offering intermediary or composite services must be especially cautious, as even minor deviations from the prescribed guidelines can lead to GST exposure, penalties, and protracted litigation.
The judicial perspective, while at times lenient in favoring substance over procedural gaps, is also evolving. Courts have not hesitated to uphold tax demands where reimbursements were found to be indistinguishable from the main supply or where documentation was weak. Inconsistencies between the CBIC’s circular and existing judicial pronouncements will likely continue to generate interpretational dilemmas until further clarification or jurisprudential crystallization emerges.
In practice, sectors such as consulting, IT, legal services, and logistics will need to examine every component of their billing arrangements. Customizing service contracts, ensuring detailed breakup of invoices, and maintaining contemporaneous documentation will be key to reducing GST risks. Businesses also need to train teams and revisit ERP systems to align with these clarifications.
In sum, while the CBIC circular does not change the law per se, it redefines how the law is to be interpreted and enforced in the context of reimbursements. The future will likely see an uptick in scrutiny by the authorities and increased disputes until clarity through advance rulings or judicial verdicts emerges. Until then, businesses must balance tax compliance with operational practicality, with a focus on documentation, legal robustness, and commercial clarity.