Like the Pre-GST regime, Reimbursement of expenses has always been grossly excluded from the purview of GST law subject to fulfillment of conditions given. Reimbursement is not charged to GST if the supplier is acting as a pure agent, i.e., expenses are incurred by the supplier on behalf of the recipient and reimbursement is claimed by the supplier of the same amount. 

Applicability of GST on reimbursement of Electricity charges in Malls, Shopping Complexes, RWAs, airports etc. has always been a matter of litigation. Whether supply of electricity is to be considered as taxable supply similar to renting service and GST should be charged at the rate of 18% or the same should be considered as reimbursement of expenses and no GST should be charged?

GST has recently come up with a very brief clarification on this matter through Circular No. 206/18/2023-GST dated 31st october, 2023. This article contains a detail discussion on applicability of GST on reimbursement of electricity charges:

1. Legal Provisions With respect to reimbursement of Expenses

1.1 GST on Ancillary Expenses

• As per Section 15(2)(c) of CGST Act, value of supply shall include:
  • incidental expenses charged by the supplier to the recipient of a supply; and 
  • any amount charged for anything done by the supplier in respect of the supply

• GST law does not provide any definition or clarification of Incidental Expenses. However, as per common parlance, Incidental expenses are those which are incurred in addition to the original supply and forms an integral part of original supply. Such as Packing, transport, commission etc.

• Therefore, as per Section 15 of CGST Act, Incidental expense forms part of value of supply and GST is payable on the same.

1.2 Expenses incurred as Pure Agent

• As per Rule 33 of CGST Rules, 2017, expense incurred by a supplier as a pure agent shall be excluded from the value of supply and no GST shall be charged on the same subject to following conditions:
  • While making payment to the third party, the supplier acts as a pure agent of the recipient;
  • the payment made by the supplier as a pure agent is separately indicated in the invoice issued by the supplier; and 
  • The supplies procured from the third party as a pure agent of the recipient are in addition to the services supplied on his own account.
• Therefore, if all the above mentioned conditions are satisfied, the amount charged in the capacity of a pure agent is not liable to GST. If a supplier fails to meet any of the above mentioned conditions, reimbursement shall be included in the value of supply.

1.3 Composite Supply

• GST law also provides the concept of composite supply under Section 8 of CGST Act.
• Composite supply means supply consisting of one or more supplies wherein one of the supplies is considered as principal supply. In such a case, the entire supply shall be considered as supply of such principal supply.
• However, what if the value of composite supply includes some reimbursement of expenses as well.

Different provisions of GST Law deals with reimbursement of expenses and However, no clarity is provided as to which supply is to be considered as incidental supply or composite supply or supply as pure Agent and which provision is to be invoked in which situation.

2. CBIC Clarification on reimbursement of electricity charges

CBIC vide Circular No. 206/18/2023-GST  dated 31st October, 2023, issued clarification on applicability of GST on certain services. Para 3 of the circular discusses applicability of GST on  reimbursement of electricity charges received by real estate companies, malls, airport operators etc. from their lessees/occupants.

a. Supply of Electricity considered as Composite Supply

• CBIC has clarified that if electricity is supplied bundled with renting of immovable property or maintenance of premises then such supply shall be considered as composite supply and GST shall be charged accordingly.
• In this composite supply, principal supply is renting of immovable property or maintenance of premises. Supply of electricity is an ancillary supply. 
• Therefore, the GST rate applicable on renting of immovable property or maintenance of premises shall apply on electricity supply as well. 
• Such provision will apply even if electricity is billed separately.

b. Supply as Pure Agent

• CBIC has clarified that when the electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., as a pure agent, it will not form part of the value of their supply. 
• Further, when they charge for electricity on an actual basis i.e., the same amount for electricity is charged from the lessees as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as a pure agent for this supply.
• Accordingly, no GST is applicable on electricity charges.

 3. Ambiguities in Circular

CBIC has come up with a very brief circular despite this matter may contain multiple scenarios and taxability may change with change of any facts or circumstances of the case. Above mentioned circular creates following ambiguities:

a. Composite Supply despite of raising a separate Invoice:

• CBIC has clarified that renting of Immovable property alongwith renting of immovable property shall be considered as Composite supply and renting of immovable property shall be considered as principal supply.
• These provisions shall apply even if a separate invoice is raised for supply of electricity.
• However, as per Circular No. 47/21/2018-GST dated 8th June, 2018, CBIC clarified that Where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately. 
• In common parlance as well, if a separate invoice is raised for a separate set of services, GST is charged at the respective rate. This clarification may create ambiguity for the other cases as well.

b. Supply of Electricity by Real Estate Agent in different scenarios

• Circular has clarified that when real estate agents, Resident Welfare Associations (RWAs), Real Estate Developers etc. charge the same amount of electricity as charged by the state authority, such supply shall be considered pure agent.
• However, circular has failed to appreciate other scenarios such as where common area electricity charges are recovered on the basis of area occupied, Electricity charges are recovered as per sub-meters installed etc.
• Whether such supplies shall be considered as reimbursement on Actual basis or GST shall be applicable on the same considering it composite supply.

c. GST when only maintenance expense is required to be given

• In case of self occupied property, the owner is required to pay Maintenance expense and electricity expenses.
• In most cases, Electricity expenses are far more than the Maintenance Expenses.
• As per circular, maintenance of premises is considered as principal supply and supply of electricity is considered as ancillary supply.
• However, practically, both supplies are independent and supply of electricity is nowhere bundled with maintenance expenses.

d. Deeming provision of Pure Agent

• As per Circular, when electricity is supplied by the Real Estate Owners, Resident Welfare Associations (RWAs), Real Estate Developers etc., on an actual basis, i.e., the same amount for electricity is charged from the lessees as charged by the State Electricity Boards or DISCOMs from them, they will be deemed to be acting as a pure agent for this supply.
• However, a supplier is considered as a pure agent only when provisions of Rule 33 of CGST Rules are compiled with.
• Whether, RWAs, Real Estate Developers etc. are required to comply with other provisions of Rule 33 of CGST Rules or they will be deemed as pure agents in all scenarios.

4. Conclusion

The circular is issued to provide clarity on taxability of reimbursement of electricity charges. It has clarified the taxability without considering the consequences in other scenarios. Department may end up applying composite supply concepts in scenarios where separate invoices are also issued. 

This clarification on binding on field formations. The circular has considered supply of electricity with renting of immovable property as composite supply without discussion of different possible facts and without discussing legal provisions of GST Law. It may create litigation for other reimbursement of expenses such as Out of pocket expenses. 

In this situation, the supplier is required to draft the contract cautiously as any changes in terms and facts may lead to taxability of the entire amount. It is of utmost importance to get these agreements and transactions vetted from the professionals and incorporate the specific clause to protect the interest of both the supplier and recipient.