A common issue faced by businesses is whether GST must be paid when commission is paid to an unregistered person.
The short answer is: GST is not automatically payable merely because commission is paid to an unregistered person.The liability depends on the exact nature of the commission service, the status of the recipient, and whether the transaction is specifically covered under Reverse Charge Mechanism.
This is where many taxpayers make mistakes. Some businesses blindly pay GST under RCM on every commission paid to an unregistered person. Others ignore RCM even in notified cases. Both approaches can create litigation.
General Rule Under GST
Under GST, the normal rule is that the supplier of goods or services is liable to pay GST. Therefore, if a commission agent is registered under GST, he will generally charge GST on his invoice, and the recipient may claim input tax credit subject to normal conditions.
However, where the commission agent is unregistered, he cannot charge GST. This does not automatically shift the liability to the recipient. The recipient becomes liable only if the transaction falls under reverse charge provisions.
Reverse Charge: Two Separate Routes
GST law contains two important reverse charge provisions:
Section 9(3)
Under Section 9(3) of the CGST Act, the Government can notify specific categories of goods or services where GST shall be paid by the recipient under reverse charge.
This means RCM applies only if the service is specifically notified.
Section 9(4)
Section 9(4) originally covered supplies from unregistered persons to registered persons. However, this provision was later restricted. At present, it does not mean that every purchase or service from an unregistered person attracts RCM.
RCM under Section 9(4) applies only to specified classes of registered persons and specified categories of goods or services notified by the Government.
Therefore, the old belief that “any payment to an unregistered person attracts RCM” is no longer correct.
Is Commission Paid to an Unregistered Person Covered Under RCM?
In normal business cases, commission paid to an unregistered person is not automatically covered under RCM.
For example, if a company pays sales commission, referral commission, marketing commission, business promotion commission, or dealer introduction commission to an unregistered individual, GST under RCM will not apply merely because the person is unregistered.
The department cannot demand GST only on the ground that the commission recipient had no GST registration. The department must show that the particular service is notified under RCM.
When Commission Can Attract GST Under RCM
There are specific cases where commission-type services may attract RCM. These include:
Insurance Agent Commission
Services provided by an insurance agent to a person carrying on insurance business are covered under RCM. In such cases, the insurance company is liable to pay GST under reverse charge.
This is a notified category and the liability is on the recipient.
Recovery Agent Commission
Services supplied by a recovery agent to a banking company, financial institution or NBFC are covered under RCM. Therefore, if a recovery agent receives commission or charges from a bank or NBFC, the recipient may be liable to pay GST under RCM.
Individual Direct Selling Agents To Banks/NBFCs
Services supplied by individual Direct Selling Agents to banks or NBFCs are also covered under RCM. Therefore, where an individual DSA receives commission from a bank or NBFC, GST may be payable by the bank or NBFC under reverse charge.
Business Facilitator/Business Correspondent Model
In banking-related cases, business facilitator and business correspondent structures may also attract RCM depending on the notified entry and actual role of the parties.
Director’s Commission
If commission or remuneration is paid to a director for services supplied by the director to the company, GST under RCM may arise where the payment is for services in the capacity of director and not salary as employee.
However, salary paid under employer-employee relationship is outside GST.
Normal Sales Commission: No Automatic RCM
A simple commission paid to an unregistered broker, introducer, marketing person, freelance sales agent, or referral agent does not automatically attract RCM.
For example:
A trader pays commission to an unregistered person for bringing customers.
A manufacturer pays sales incentive to an unregistered individual for generating leads.
A company pays referral commission to a freelancer.
A real estate consultant receives commission but is not covered under a specific notified RCM entry.
In such ordinary cases, RCM is generally not applicable unless the transaction falls under a specific notified category.
What About Section 9(4)?
Section 9(4) cannot be used casually by the department to tax every commission paid to an unregistered person.
After amendment, Section 9(4) applies only where the Government notifies:
- The class of registered persons; and
- The specified categories of goods or services received from unregistered suppliers.
Therefore, unless the recipient and the service are specifically covered, GST cannot be demanded under Section 9(4).
This is the most important defence for taxpayers.
GST Registration Of Commission Agent
If the commission agent crosses the applicable threshold limit or is otherwise required to register, the liability may fall on the commission agent under forward charge.
But if the commission agent remains unregistered and the service is not notified under RCM, the recipient is not automatically required to pay GST.
However, businesses should examine whether the agent is required to take registration. If the agent is making taxable supplies beyond threshold, non-registration by the agent may create separate compliance issues for him.
Can ITC Be Claimed If RCM Is Paid?
Where GST is correctly payable under RCM, the recipient must pay it in cash. After payment, input tax credit may generally be available if the service is used in the course or furtherance of business and is not blocked under Section 17(5).
But if GST is wrongly paid under RCM where no liability exists, it may create unnecessary working capital blockage and refund complications.
Documentation Businesses Should Maintain
Businesses paying commission to unregistered persons should maintain proper documentation, including:
Agreement or appointment letter
Nature of service
Basis of commission calculation
Payment proof
PAN details of recipient
TDS compliance, if applicable
Self-declaration regarding GST registration status
Internal note explaining why RCM is not applicable, wherever relevant
This documentation is important because commission payments are often scrutinised during GST audit, income tax assessment and departmental investigation.
Common Department Objection
The department may argue that the business received a taxable service from an unregistered person and therefore GST should be paid under RCM.
The answer is simple: under the present GST framework, receipt of service from an unregistered person is not enough. The department must identify a specific RCM entry.
Without a notified entry under Section 9(3) or applicable notification under Section 9(4), RCM demand is legally weak.
Practical Examples
Example 1: Sales Commission To Unregistered Individual
A registered company pays ₹1 lakh commission to an unregistered person for bringing customers.
If the person is not an insurance agent, recovery agent, DSA, director, or covered under any notified RCM entry, GST under RCM is generally not payable.
Example 2: Commission To Insurance Agent
An insurance company pays commission to an insurance agent.
GST is payable by the insurance company under RCM because insurance agent services are specifically notified.
Example 3: Recovery Commission Paid By NBFC
An NBFC pays commission to a recovery agent.
GST is payable by the NBFC under RCM because recovery agent services to banks, financial institutions and NBFCs are notified.
Example 4: Director Commission
A company pays commission to a director for services as director.
GST under RCM may apply. However, if the payment is salary under employer-employee relationship, GST does not apply.
Final Legal Position
GST is not automatically applicable on commission paid to an unregistered person.
The correct legal test is:
Is the commission service a taxable supply?
Is the supplier registered or liable to register?
Is the service specifically notified under RCM?
Does Section 9(4) apply to the recipient and category of service?
Is the payment actually salary, incentive, reimbursement or business commission?
Only after answering these questions can GST liability be determined.
Conclusion
The biggest misconception is that every payment to an unregistered person attracts GST under RCM. That is not the law today.
For ordinary commission payments to unregistered persons, GST under RCM is generally not payable unless the service falls under a notified reverse charge category.
Businesses should not blindly pay GST under RCM, but they should also not ignore notified cases such as insurance agents, recovery agents, DSAs, banking facilitators and directors.
The safest approach is to classify the commission service correctly, check the RCM notification, maintain documentation, and then decide the tax position.
