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GST on Reimbursement of Travel Expenses

Updated on: 27 May, 2024 05:59 PM

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. This article aims to clarify the concept of GST on the reimbursement of travel expenses, outline the conditions for claiming input tax credit, discuss the value and time of supply, and expound upon the place of supply rules governing such transactions.

What is Reimbursement of Travel Expenses?

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

What is the difference between reimbursement and allowance?

Reimbursement and allowance are two ways of compensating employees for business-related expenses. The main difference between them is:

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.

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.

Personal Expenses are Non-reimbursable Expenses

Non-reimbursable expenses are costs that the company does not repay to the employee. These expenses are often personal or unrelated to the employee’s job duties. For instance, an employee might stay at a luxury hotel during a business trip. Some examples of non-reimbursable expenses are:

  • Lost or stolen articles
  • Alcoholic beverages
  • Damage to personal vehicles, clothing, or other items
  • Services to gain entry into a locked vehicle
  • Movies charged to hotel rooms
  • Personal negligence expenses (such as fines)
  • Expenses for children, spouses, and companions
  • In-room movies
  • Alcohol (minibar)
  • Other optional amenities
  • Expenses related to personal preference/convenience
  • Valet (when self-park or other reasonable options are available)

How to Record and Prove Reimbursable Expenses

  • Keep enough records to prove your expenses or have sufficient evidence to support your statement.
  • Produce a log of expenses for a certain period called an expense report.
  • Turn over the expense report to Human Resources with verifiable evidence in the form of confirmations and receipts.
  • Keep evidence of all your claimed payments, such as receipts, invoices, and reports, that show the amount, the business reason and connection, and the time and location of each expense.
  • Provide a valid receipt for each expense.

Frequently Asked Questions

Q- What is the difference between a refund and reimbursement of travel expenses?

A refund is a return of money that has been paid for a service or product that was not received or was unsatisfactory. A reimbursement is a payment made to a person for an expense that they have incurred on behalf of another person or entity. For example, if a traveler cancels their flight due to a medical emergency, they may get a refund from the airline. If an employee travels for a business meeting and pays for the flight ticket from their own pocket, they may get reimbursement from their employer.

Q- What if a travel allowance is provided instead of reimbursement?

If a travel allowance is provided to an employee, it is considered a taxable supply, and GST may be applicable. The tax treatment may vary depending on the nature of the allowance and local tax regulations.

Q- 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.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.