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The RMCD has released a service tax guide. The salient points of the Guide are as follows: -
| Term | Definition |
| Disbursement | The recovery of a payment made on behalf by a claimant who is acting as an agent |
| Reimbursement | The recovery of a payment made on behalf by a claimant who is acting as a principal from another party |
| Claimant | A registered person who recovers expenses he incurred on behalf of the customer |
| Customer | Any person who receives a service directly or indirectly from a service provider through a claimant |
| Service provider | A person who provides directly or indirectly, a service to the customers through a claimant |
Recovery of expenses as Principal or an Agent
To determine if a recovery of expenses is a disbursement or a reimbursement, it is important to establish whether the claimant acted as a principal or as an agent when he acquired the service from the service provider.
When there is a written contractual agreement
When a written contractual agreement exists between the claimant and the customers. The contractual terms should indicate if the claimant incurred the expense as an agent or a principal.
| Principal | Agent | |
| Recovery of expenses | Treated as service provided by the claimant to the customer | Not treated as a service provided by the claimant to the customer |
| Recovery with mark up | Claimant is treated as a principal and such recovery will be treated as a reimbursement (i.e. subject to service tax) |
When there is no written contractual agreement or ambiguous contract
Without a written agreement between the claimant customer, or where the agreement cannot identify clearly the contractual relationship, the status of the claimant shall be determined according to any of the following rules: -
| Rules | Principal | Agent |
| Contractual liability and assumption of responsibilities and risks | Acquired the services in his own name or capacity | Not a party to the contract and merely arranged for the provision of services on behalf of his customer |
| Legal obligations to make payment or payment arrangement | Has the legal obligation to make payment to the service provider for the services | Does not have the legal obligation to make payment to the service provider unless authorised by the customer |
| Alteration to the nature and value of expenses | Can alter the nature or value of the services and make a decision on the value of expense to recover | Not able to alter the nature or value of services made between the customer and the third-party service provider unless authorised to do so by the customer |
| Identities of parties and transaction involved | The claimant is the only party known to the third-party service provider and the customer does not know the cost incurred by the claimant on the acquisition of services from third party service provider | The third-party service provider knows the identity of the customer and the customer knows the exact cost incurred by the claimant on the acquisition of services from the third-party service provider |
Service Tax Treatment on Disbursement and Reimbursements
| Service tax treatment | Disbursement | Reimbursement | |||
| Agent or principal | Non-taxable (if no mark-up) | Taxable (if it relates to making a prescribed taxable service) | |||
| Agent or principal | Agent | Principal | |||
| Customer’s knowledge of service | Customer knows the services are provided by a service provider and not the claimant | Customer does not know the services are provided by the service provider | |||
| Amount claimed from customer | Exact amount is claimed from the customer and the claimant shall not alter the nature of the services or add on the value of the services | Amount claimed from the customer may include mark-up and the claimant may alter the nature of the services or add on the value of the services | |||
| Supporting documents | Copy of invoice from the service provider is attached together with the invoice issued by the claimant to the customer as supporting document | No supporting documents attached | |||
| Treatment of mark-up | Full amount recovered is regarded as a provision of service and subject to service tax (if it relates to a taxable service being performed). The claimant would be treated as a principal as he can alter and change the value of the original service (i.e. service by the third-party service provider). However, if the service provider’s invoice is attached with the claimant’s invoice , then only the mark-up will be subject to service tax. |
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Other types of cost recoveries i.e. out-of-pocket expenses (OPE)
Where not specifically stated in a contract, OPE are generally considered taxable services as they form part and parcel of the taxable services provided. However, OPE which are charged separately would not be a taxable service provided by the claimant to his customer if all the conditions below are fulfilled: -
- It is stated in the contract that the customer will bear the OPE costs;
- It is paid on a back-to-back basis (without any mark-up); and
- The claimant provides the supporting documents when making the claim from the customer.