UNRAVELING THE GST CONUNDRUM: AMBIGUITIES IN TAXATION OF REIMBURSEMENT OF ELECTRICITY EXPENSES

Circular No. 206/18/2023-GST

1. Introduction

The recent circular issued by the Central Board of Indirect Taxes and Customs (CBIC) aimed to clarify the taxation of reimbursement of electricity expenses under the Goods and Services Tax (GST). However, the intended resolution of persistent litigation surrounding this matter remains elusive. This article delves into the complexities introduced by the CBIC Circular, addressing the ongoing debate and the unanswered questions that require further examination.

2. Background

2.1 Legal Provisions under the GST Law:

The GST law doesn't explicitly address the taxability of reimbursement of expenses. However, it includes provisions stating that the value of supply encompasses incidental expenses and amounts charged for services related to the supply. Exceptions are made when the supplier acts as a pure agent under specific conditions outlined in Rule 33 of the Central Goods and Services Tax Rules, 2017.

2.2 Jurisprudence So Far:

Divergent rulings have emerged in various jurisdictions, creating uncertainty. Notable cases, such as Re: Indiana Engineering Works and Re: E-Square Leisure, showcase conflicting interpretations on whether certain expenses should be considered incidental or part of a composite supply.

2.3 Clarification by the CBIC:

Circular No. 206/18/2023-GST, dated 31-10-2023, attempts to bring clarity but introduces new complexities. It asserts that electricity charges bundled with renting of immovable property form a composite supply. However, it deems Real Estate Owners, Resident Welfare Associations (RWAs), etc., as pure agents when electricity charges are reimbursed on an actual basis.

3. Intricacies in the Circular

3.1 Deeming fiction in case of reimbursement on an actual basis:

The Circular introduces a deeming fiction of RWAs as pure agents when electricity charges are reimbursed on an actual basis. This raises questions about the validity of such deeming fiction, as it goes beyond the conditions specified in Rule 33.

3.2 Ambiguity as to the scope of 'actual basis':

The Circular allows the pure agent status when electricity expenses are reimbursed on an 'actual basis.' However, it remains silent on scenarios like pro-rata basis reimbursement, causing uncertainty about the extent of 'actual basis.'

3.3 Circular fails to clarify the applicability of relevant provisions on different facts:

The Circular provides conflicting guidance on when electricity expenses constitute a composite supply or when the supplier acts as a pure agent. Clear guidelines are needed to determine the applicability of these concepts based on specific factual circumstances.

3.4 Composite supply even if a separate bill is raised for reimbursements:

The Circular asserts that even with a separate bill, electricity charges and principal supplies form a composite supply. This contradicts previous clarifications and raises doubts about the treatment of separate bills for goods and services.

3.5 Absence of guidance on interpreting the terms 'bundled' and 'incidental':

The Circular does not address the contradictory interpretations on whether electricity expenses should be considered ancillary or incidental. Clear guidance on the terms 'bundled' and 'incidental' in the context of reimbursement of expenses is lacking.

4. Concluding Remarks

The CBIC Circular, aimed at resolving the taxability of reimbursement of electricity expenses, falls short of providing the expected clarity. Instead, it introduces complexities and raises additional questions. Given the unresolved debate and contradictory jurisprudence, there is an urgent need for comprehensive guidance to clarify the taxability of such reimbursements. Until further clarification, taxpayers must meticulously review contracts and assess the bundling of supplies to determine potential tax implications. The impact of this circular extends beyond electricity expenses to other reimbursements, necessitating careful consideration in professional assignments.

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

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