Travel expense is an unavoidable element of conducting business in today’s globalized world. Employees frequently travel to different places to attend meetings, conferences, training sessions, or fulfill various professional duties. These costs typically include transportation, lodging, meals, and other incidental expenses. Employers usually establish reimbursement policies to offset these costs and allow employees to recover the funds they have spent out of their own pocket. However, the reimbursement of travel expenses becomes more complex when considering Goods and Services Tax (GST). The applicability of GST to the reimbursement depends on the nature and circumstances of the incurred expenses
What does reimbursement of expenses mean?
Travel expense reimbursement involves compensating employees for the costs they personally incurred during a business trip. Such costs typically cover transportation, meals, accommodation, and other services directly associated with the business objectives of the trip. While employers can claim reimbursement costs as tax deductions, employees are generally unable to deduct these expenses. To receive reimbursement, employees must furnish proper documentation substantiating that the expenses were indeed business-related.
Examples of travel expenses that can be reimbursed:
- Airfare, train fare, bus fare, taxi fare, or car rental fees for traveling to and from the destination
- Mileage allowance or fuel costs for using a personal vehicle for business travel
- Parking fees, tolls, and other transportation-related expenses
- Hotel charges for overnight stays
- Meals and incidental expenses (such as tips, laundry, phone calls, etc.) within reasonable limits
- Conference fees, seminar fees, or other professional development costs
Reimbursement of expenses refers to the repayment of money spent by a person. In business transactions, this usually happens when a supplier incurs expenditure on behalf of the recipient who is supposed to incur the said expenditure.
There are two types of expenses that may get reimbursed to the supplier under GST:
- Incidental expenses incurred by the supplier in the course of supply. This could be in the form of commission, packing, travelling expenses, etc., and form a part of the supply value. These expenses are usually incurred before or at the time of delivery of the goods or supply of the services.
- Expenses that the supplier incurs as a pure agent. These are expenses that the supplier has incurred on behalf of the recipient but do not form a part of the supply value. Examples include registration fees or taxes paid to the government, transportation charges paid to a third-party transporter that the recipient has authorised the supplier to incur, etc.
What is the difference between reimbursement and allowance?
Reimbursement involves the employer compensating the employee for verified expenses related to travel, medical care, or education. The employee must furnish receipts or other evidence of the expenditure. This form of compensation is not classified as income and remains non-taxable for the employee.
On the other hand, an allowance is a fixed sum that the employer provides to the employee in advance or alongside their salary, irrespective of whether the anticipated expense is incurred. No proof of the expense is required from the employee. Unlike reimbursement, allowances are considered as income and are subject to taxation for the employee unless specific conditions exempt them.
What is the impact of GST on reimbursement of expenses?
All reimbursements of expenses shall form a part of the value of supply, except when incurred as a pure agent. To break this down-
Section 15 of the CGST Act provides that the value of a supply of goods or services or both shall be the transaction value. This is the price paid or payable for the supply of these goods or services and applies where the supplier and the recipient are not related, and the price is the sole consideration for the supply.
Section 15(2) clause (c) states that any incidental expenses charged by the supplier to the recipient and any other amount charged for anything done during the supply until the time of delivery of the goods or supply of the services shall be included in the value of the supply. Hence, any goods or services provided by the supplier, for which a consideration is charged from the recipient, shall be included in the transaction value and chargeable to tax.
With regard to reimbursement of expenses incurred as a pure agent, Rule 33 of the CGST valuation rules provides that any expenditure incurred as a pure agent will be excluded from the value of supply, and hence, from the aggregate turnover as well. However, the supplier will need to satisfy the following conditions for the exclusion from the value of supply:
- The supplier acts as a pure agent of the recipient when he makes a payment to a third party after authorisation by such recipient.
- The payment that the pure agent made on behalf of the recipient is indicated separately on the invoice issued by the pure agent to the recipient.
- The supplies procured by the pure agent from the third party are in addition to the supplier supplies’ services on his account.
GST on Reimbursement of Travel Expenses
GST Rates for Travel Services:
- Without the option of Input Tax Credits (ITC), a 5% GST is applied to the gross tour price.
- With ITC, an 18% GST rate is applied.
Place of Supply for Travel Services:
- The location of the service provider, the recipient, and the nature of the service determines the place of supply.
- For example, in hotel reservations, the place of supply is the city where the hotel is located.
GST Implications for Reimbursement of Travel Expenses by Employers to Employees:
- Employers can claim a GST credit if they reimburse employees for taxable expenses related to business activities.
- Reimbursement from another party may be subject to GST or exempt, depending on the nature of the reimbursement.
GST Implications for Reimbursement of Travel Expenses by Service Providers to Clients:
- Expenses incurred on behalf of a client during the supply of taxable services are excluded from the value of supply for tax purposes under certain conditions.
- Conditions include acting as a pure agent, indicating the payment separately in the invoice, recovering only the amount paid to the third party, and using the goods or services for the recipient’s supply.
FAQs
Are there any exceptions where GST may be applicable on travel expense reimbursements?
In certain cases, such as employee services provided to a related party for consideration, GST may be applicable to the reimbursement. Additionally, if the reimbursement includes an element of profit or service charge, GST may be levied on that portion.
Are travel allowances taxed under GST ?
In the cases where the company provides a travel allowance to the employee, it is considered to be a taxable supply and is therefore charged with GST. However, unlike reimbursement of travel expenses GST, the tax rate might differ based on the nature of the allowance and the specific tax regulations.