Understanding the Liability of Agent and Principal – Section 86 of GST

In the dynamic landscape of GST in India, it is vital for businesses to understand the legal relationships that affect their tax obligations. One such critical relationship is that of a principal and agent, governed under Section 86 of the CGST Act, 2017. This provision outlines the joint and several liability of the agent and principal in cases where taxable goods are supplied or received through the agent.

In this blog post, we will explore the scope, implications, and key compliance requirements under Section 86, and provide insights for both principals and agents to remain GST-compliant.

What is Section 86 of the CGST Act?

Section 86 of the CGST Act deals with the liability of agents and principals in relation to the supply or receipt of taxable goods. The provision states:

“Where an agent supplies or receives any taxable goods on behalf of his principal, such agent and his principal shall, jointly and severally, be liable to pay the tax payable on such goods under this Act.”

This means that both the agent and the principal are equally responsible for paying GST on taxable goods supplied or received through the agent.

Key Elements of Section 86

To better understand this provision, let us break down its key components:

1. Agent and Principal Relationship

The CGST Act defines an “agent” under Section 2(5) as a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer, or any other mercantile agent, who carries on the business of supply or receipt of goods or services on behalf of another person (the principal).

2. Supply or Receipt of Taxable Goods

Section 86 applies only when an agent supplies or receives taxable goods on behalf of the principal. It does not apply to services or exempt goods.

3. Joint and Several Liability

This legal term means that the tax authorities can recover the tax from either the agent or the principal, or both. If one fails to pay, the other is equally liable, regardless of who conducted the transaction.

Why Section 86 Matters

Understanding the implications of Section 86 is important for the following reasons:

1. Avoidance of Tax Evasion

The provision ensures that the government can recover GST dues even if one party defaults, thereby reducing the risk of revenue loss due to tax evasion or disputes.

2. Increased Responsibility for Agents

Agents need to be cautious and maintain proper records of all transactions they carry out on behalf of the principal. Mismanagement or incorrect reporting can make them directly liable for the principal’s GST dues.

3. Clarity on Tax Obligations

Businesses engaging agents must clearly understand that they cannot absolve themselves of GST responsibilities simply by delegating the task of supply or receipt of goods.

Compliance Requirements for Agents and Principals

To mitigate the risks associated with joint and several liability under Section 86, both agents and principals should follow certain best practices:

a. Maintain Proper Documentation

Detailed agreements outlining the scope of the agency relationship, roles, and responsibilities must be executed and preserved.

b. Separate GST Registration if Required

If an agent operates in multiple states or in a different state than the principal, they may need a separate GST registration as per GST law.

c. Issuance of Invoices

It must be clearly established who is issuing the invoice—agent or principal. The invoice must comply with GST invoicing rules, and it must be clear on whose behalf the supply is made.

d. Reconciliation of Supplies

Periodic reconciliation between the records of the principal and the agent is essential to ensure there are no mismatches or tax underpayments.

Case Law and Advance Rulings

Various advance rulings and judicial interpretations have emphasized the importance of the principal-agent relationship in GST. For example:

• The Authority for Advance Rulings (AAR) has clarified in multiple cases that mere facilitation or support services do not qualify as an agent-principal relationship, unless there is an actual supply or receipt on behalf of the principal.

• Supply made by an agent in their own name but for the benefit of the principal may still invoke Section 86 liability.

Hence, it is important for businesses to structure agency arrangements carefully and comply with all disclosure norms under GST.

Conclusion

Section 86 of the CGST Act plays a significant role in ensuring GST compliance in agency transactions involving taxable goods. It imposes joint and several liability on both the principal and the agent, reinforcing the need for transparency and due diligence in such business relationships.

Whether you are a principal appointing agents across regions or an agent conducting supplies on behalf of another entity, understanding your liabilities under GST law is critical. Keeping accurate records, following proper invoicing procedures, and staying informed about legal interpretations can help you avoid unnecessary litigation and tax demands.

Frequently Asked Questions (FAQs)

1. Does Section 86 apply to services?

No, Section 86 specifically applies to taxable goods, not services.

2. Who is liable if the agent fails to pay GST?

Both the agent and principal are jointly and severally liable. The tax authorities can recover dues from either party.

3. Can an agent be held liable for transactions they were unaware of?

Liability arises only when the agent is involved in the supply or receipt of goods on behalf of the principal. Mere representation or introduction does not create liability under Section 86.

If you are looking for professional assistance to ensure GST compliance in agency transactions, feel free to consult us at +91 9769647582.