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Udeetta Sarma

September 2, 2024

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Basics of GST

GST RCM on Commission and Brokerage

The Introduction of Goods and Services Tax (GST) has entirely revamped the Indian taxation regime. GST rate on commission and brokerage is the most hot topic at present. In this blog, we delve into how GST impacts commission income and the related rates as well as compliance guidelines for individuals or companies who earn money on a commission basis in India.

Understanding GST on Commission

Commission is the money paid to an individual or business for taking and processing orders between two or more parties. From a GST perspective, the commission has been classified as a 'supply of services' under the statute. According to this, all commission agents and brokers or any other such type of agent are required to pay GST on the revenue collected by way of commissions.

Is GST Applicable on Commission?

CGST is also applicable to commission income. If you get commission income by way of doing some activity with or without employing people then also GST applies to both individual and business entities but they must cross the specified threshold turnover limit as per the provision of GST law. As per the GST regime, the commission income is service so its supply becomes chargeable to GST.

Definition of Broker and Commission Agent under GST

A broker acts as an intermediary, connecting parties to a transaction without holding ownership of the goods or services being traded. Their primary role is to negotiate and arrange deals, earning a commission for their services. A commission agent acts on behalf of another person (the principal) to buy or sell goods or services, with the authority to negotiate and finalize transactions on behalf of their principals.

GST on Brokerage

When a broker acts as the intermediate between two parties in making important business deals he/she is paid a commission, which is called brokerage. A commission is a service under the GST framework, so GST on brokerage too has to be levied with a charge of service tax.

If the aggregate turnover of brokers who undertake multiple activities such as real estate deals, stock market transactions and insurance broking crosses a specified threshold limit then they have to take registration under GST. If he registers, they are charging GST on brokerage income.

GST rate on commission and brokerage is applicable in the following:

Some of the common sectors where commission and brokerage income is prevalent include:

1. Real Estate

Brokers and agents get a commission when they help you purchase or rent a property.

2. Stock Market

Opposite of a free market, with stockbrokers making money based on the commissions generated from executing other investor trades.

3. Insurance

Insurance agents make money on both the front and back end from selling insurance policies.

4. Finance

Loans, mutual funds and such have intermediaries who make money by taking a commission for their middleman's job.

5. E-commerce Platforms

Marketplaces charge commissions from sellers for facilitating sales on their platforms.

GST on commission

GST on commission is charged at 18%. This rate is applicable on all types of commission income unless specifically exempted under any provision of GST law.

It charges a rate of 18% GST on the entire value generated from commission income received by the intermediary. Even if the commission amount is small, no exemption from GST can be claimed on this income by commission agents brokers and intermediaries.

Example of GST on Commission Calculation:

Let’s say a real estate broker earns a commission of ₹1,00,000 on a property deal. The GST applicable at 18% would be:

GST = 18% of ₹1,00,000 = ₹18,000

Thus, the total payable amount by the client would be ₹1,00,000 (commission) + ₹18,000 (GST) = ₹1,18,000.

The broker would then need to deposit the ₹18,000 GST to the government as part of their GST return filing.

Service Accounting Codes (SAC) for Commission and Brokerage Services

These are Services under GST, the SAC code is defined for commission and brokerage services. For example, if real estate agents are providing services, the applicable SAC codes are 997221 (property management services) and 997222 (building sales made under a contract or on a fee/commission basis).

GST Registration for Commission Agents and Brokers

GST registration is necessary if the aggregate turnover of individuals and entities providing commission and brokerage services has crossed the threshold limit. At the moment, the threshold turnover limits are as follows:

- For service providers in most of the Indian states, the limit is INR 20 lakh.

- For service providers in special category states like the northeastern states and Jammu & Kashmir, the limit is INR 10 lakh.

GST registration is followed by regular filing of returns, including:

- GSTR-1: This is the return for details of outward supplies, filed either monthly or quarterly.

- GSTR-3B: This is a summary return of outward supplies, the net tax payable, and input tax credit, to be filed monthly.

Exemptions for GST on Commission and Brokerage Services

Some of the services provided on a commission basis are not subject to GST. Services by fair price shops to the Central Government in the course or furtherance of their business of sale of rice, wheat, and other coarse grains, and support services to agriculture, forestry, fishing, and animal husbandry are also exempt.

Compliance Requirements for Brokers and Commission Agents

Registered brokers and commission agents must submit:

GSTR-3B: Return on a monthly summary.
The first type is GSTR-1: Return for outward supplies.
GSTR-9: Annual return.

They need to keep proper records of all transactions and pay GST on time on GST collected on commission and brokerage income.

TDS on Commission and Brokerage Income

According to the provisions of Section 194H of the Income Tax Act, the TDS is applicable on commission or brokerage income over ₹15,000. The TDS rate is 5% (pre-1st Oct 2024) and 2% (post-1st Oct 2024) TDS is deducted from the amount excluding GST.

Comparison of taxes before and after GST

Particulars	Taxed Under Service Tax Regime (Rs)	Taxed Under GST Regime (Rs)
Value of Taxable Supplies	5,000	5,000
Service Tax @ 15%	750	–
CGST @ 9%	–	450
SGST @ 9%	–	450
Total GST	–	900
Invoice Value	5,750	5,900

Suppose you are running a business offering consulting services. You charge your client Rs 5,000 for your service. Under the previous Service Tax regime, a flat rate of 15% was applied, resulting in an additional Rs 750 tax. So, the invoice amount would be Rs 5,750 (Rs 5,000 + Rs 750).

However, under the GST regime, GST is split between Central (CGST) and State (SGST) taxes. For this service, both CGST and SGST are charged at 9% each. So, the tax becomes Rs 450 (CGST) + Rs 450 (SGST), resulting in a total GST of Rs 900. This increases the total invoice value to Rs 5,900 (Rs 5,000 + Rs 900).

The shift from service tax to GST leads to different tax components but slightly higher overall tax in this example.

Input Tax Credit (ITC) on GST Paid

This is one of the main advantages as under GST, claiming Input Tax Credit (ITC) is possible. According to Input Tax Credit Regulations, Commission agents and brokers who are registered with GST can claim refunds on the inputs against taxes recovered in commissions. Here ITC is one of the practices to ensure that tax paid on inputs should not result in cost, and it can be adjusted against output liability.

Eg: if there are any services purchased from a commission agent like office space rent, or telecommunication on which GST needs to be paid then they are eligible for Input Tax Credit and can use this in reducing their overall tax liability.

Liability of Principal and Agent under GST

Under the GST law, where the agent supplies goods on behalf of their principal, both the principal and agent shall, be jointly and severally liable to pay GST on the taxable supply of goods. If ABC Ltd. appoints Mr. A as an agent (i.e. an agent of the seller) to sell goods for them, and Mr. A sells those goods to Mr. B acting on behalf of ABC Ltd. then ABC Ltd. and Mr. A will be jointly and severally liable for GST on those goods if either of them fails to comply with their obligation.

Special Cases: Reverse Charge Mechanism

Commission and brokerage income is subject to the Reverse Charge Mechanism (RCM), in some circumstances. In RCM, the liability to pay GST is put on the recipient of service and not the supplier i.e., commission agent or broker. This is subject to the fact that it can be claimed only in certain circumstances, like commission paid to an agent of a foreign service provider or some services notified under GST law.

In RCM the party receiving service commission has to pay applicable GST on it and can take ITC if he is eligible for that.

Example of RCM:

A business located in India hires a commission agent based outside India to facilitate the import of goods. In this case, the business in India (the service recipient) would be required to pay GST under the RCM mechanism for the commission paid to the foreign agent.

Compliance and Record-Keeping for Commission-Based Income

Like any other business, individuals and entities earning income through commission and brokerage must adhere to specific compliance and record-keeping requirements under GST. Some of the essential compliance measures include:

1. Issuance of Tax Invoices

All services provided by commission agents/brokers are liable for tax and need to be invoiced, while the invoices should also detail the amount of discount or commission charged, the rate at which GST is levied on them as well as their respective Goods and Services Identification Number (GSTIN).

2. Timely Filing of Returns

Registered agents and brokers have to file their GST returns on a monthly or quarterly basis as per the filing frequency they have chosen. Not filing on time will result in penalties and interest for the tax you owe.

3. Maintaining Proper Books of Accounts

Commission Agents/Brokers would be required to maintain proper documentation in respect of their transactions including record of commission earned, GST charged, ITC claimed and returns filed.

Exemptions and Exceptions

Although GST is chargeable on most commission income, there are some circumstances where the provision of commission services can be exempted from GST. For example, if the service is in payment of commission and is granted to a non-profit organization or selected government groups exempted specifically from this rule depending on the basis for the transaction.

Moreover, they may not be required to get registered under GST/Pay the GST on their income if the turnover of the commission agent/broker falls below prescribed threshold limits.

Conclusion

To sum up, the GST rate on commission and brokerage is a vital term in the arena of taxes under the regime initiated by the Central Government (GST) prevalent across every corner at lengths. As a real estate broker, stockbroker, insurance agent and any other intermediary who has an income in the form of commission comes under GST purview which is not known to many.

GST on Commission only 18 % Tax is applicable in all sectors and now it is mandatory to have GST registered if the turnover crosses the defined limit. Pre-requisites for maintaining records, filing returns timely and understanding the mechanism of input tax credit will help the commission agent or broker to comply with the law ensuring proper availment which would ultimately optimise their tax liability.

For everyone earning commission income, staying updated with GST laws and seeking professional advice when needed will help you successfully deal with the intricacies of GST in India.

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