GST on Reimbursement of Travel Expenses

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 verifying 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

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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.

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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.

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Understanding Varying GST Rates for Travel Services

The different GST rates (with and without Input Tax Credit or ITC) reflect a balance between simplifying tax compliance and ensuring proper accounting. Lower rates without ITC are designed for services where ease of compliance is prioritized, while higher rates with ITC facilitate detailed record-keeping and transparent business practices.

Pre-arranged tours purchased by individuals benefit from the simpler taxation of the lower rate without ITC, minimizing compliance burdens. On the other hand, businesses requiring detailed expense records and the ability to claim ITC will opt for the higher rate, ensuring proper documentation and accountability.

Practical Illustrations:

The choice between the 5% rate (without ITC) and the 18% rate (with ITC) depends on specific business needs and the nature of the travel service. Consider these scenarios:

• Corporate Retreat: A company organizing a corporate retreat might choose the 18% rate with ITC to obtain separate bills and invoices for cost allocation across different departments. This allows for detailed expense tracking and internal accounting.
• All-Inclusive Tour Packages: A travel operator offering all-inclusive tour packages to individual consumers might prefer the 5% rate. This simplifies the tax process and allows for a straightforward, single price point for customers.

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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)

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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.

If you still need help understanding GST on reimbursement of travel expenses, Contact our GST Experts Now!

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