Services provided by insurance and recovery agents are considered as a taxable supply under GST law. This includes commissions earned for services rendered.
The GST rate applicable to insurance and recovery agents typically is 18%.
If the agent is unregistered, the recipient of the service (such as the insurance company or bank) may need to pay GST under reverse charge mechanism (RCM).
In this article, we will discuss applicability of GST on insurance agents and recovery agents under the reverse charge mechanism (RCM).
Both, services supplied by an insurance agent to persons carrying on insurance business and services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company, are covered under GST reverse charge mechanism.
When and how reverse charge mechanism is applicable to insurance agents?
The reverse charge mechanism (RCM) in the context of insurance agents refers to a tax arrangement where the liability to pay tax shifts from the supplier (the insurance agent) to the recipient (the insurance company)
Reverse charge mechanism (RCM) applies when the service is provided by an unregistered insurance agent and when the insurance company being the service recipient is a registered entity.
In this case, the insurance company is responsible for paying the GST on the commission paid to the insurance agent under the reverse charge mechanism.
Under RCM, the insurance company must account for the tax on the commission paid to the agent in its GST returns.
The insurance company can typically claim input tax credit for the GST paid under RCM, subject to compliance with GST rules.
Both the insurance agent and the insurance company must ensure proper documentation and compliance with GST regulations to avoid penalties.
GST Reverse Charge Mechanism applicable to recovery agents
Recovery agents provide services to banks and financial institutions for recovering dues from borrowers, which qualifies as a taxable service under GST.
The standard GST rate applicable to recovery agent services is 18%.
If the recovery agent is unregistered, the liability to pay GST may shift to the recipient (the bank or financial institution) under the reverse charge mechanism (RCM). In this case, the bank must pay the GST and can claim input tax credit.
The banks or financial institutions can typically claim input tax credit on the GST paid for services received from recovery agents, subject to compliance with the GST rules.
Both recovery agents and banks or financial institutions must maintain proper documentation, such as invoices and agreements, to ensure compliance with GST regulations.
Services supplied by individual direct selling agents (DSAs) and business facilitator (BF) to a bank or non-banking financial company (NBFCs) are covered under RCM. In this case, the banking company or the non-banking financial company is required to pay tax under RCM.
