Section 86 of the Central Goods and Services Tax Act, 2017 deals with the liability of an agent and principal in relation to taxable goods supplied or received by an agent on behalf of the principal.
The provision is short, but it has important consequences for businesses that operate through agents, commission agents, brokers, factors, auctioneers, del credere agents and other mercantile agents. Section 86 provides that where an agent supplies or receives taxable goods on behalf of the principal, both the agent and the principal are jointly and severally liable to pay the tax payable on those goods under the CGST Act.
The purpose of this provision is to ensure that the existence of an agency relationship does not create uncertainty about the Government’s ability to recover GST relating to taxable goods handled through that arrangement.
Section 86 should also be read together with the definition of “agent”, the definition of “principal”, Schedule I of the CGST Act and CBIC’s clarifications concerning principal-agent transactions.
What Is Section 86 of the CGST Act?
Section 86 is titled “Liability of agent and principal.”
The section provides:
“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 is a single-subsection provision.
Its main elements are:
- there must be an agent and a principal;
- the agent must supply or receive taxable goods;
- the agent must be acting on behalf of the principal; and
- both the agent and principal are jointly and severally liable for the GST payable on those goods.
Meaning of Agent Under the CGST Act
The meaning of “agent” is important for understanding Section 86.
Under Section 2(5) of the CGST Act, an agent includes a person such as a:
- factor;
- broker;
- commission agent;
- arhatia;
- del credere agent;
- auctioneer; or
- other mercantile agent,
who carries on the business of supplying or receiving goods or services, or both, on behalf of another person.
Therefore, the term “agent” is not restricted to someone who is simply called an agent in a business agreement.
The statutory definition looks at the nature of the business relationship and the activities carried out on behalf of another person.
Meaning of Principal Under the CGST Act
Section 2 of the CGST Act defines “principal” as a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
In simple terms:
Principal = Person on whose behalf the agent acts
Agent = Person who carries on the relevant supply or receipt activity on behalf of the principal
For example, if a manufacturer appoints a commission agent to sell its goods on its behalf, the manufacturer may be the principal and the commission agent may be the agent.
What Does Section 86 Actually Cover?
Section 86 specifically refers to an agent who:
- supplies taxable goods on behalf of the principal; or
- receives taxable goods on behalf of the principal.
In either situation, the agent and principal are jointly and severally liable for the tax payable on those goods.
The wording is important because Section 86 specifically speaks about taxable goods.
It does not simply say that every transaction between an agent and principal creates a joint GST liability for every type of supply.
Joint and Several Liability Under Section 86
The phrase “jointly and severally liable” is the central feature of Section 86.
It means that both the principal and the agent can be held responsible for the GST payable on the taxable goods covered by the provision.
The Government’s claim is therefore not necessarily limited to recovering the tax from only the principal or only the agent.
Example
Suppose a principal supplies taxable goods through an agent and GST of ₹2 lakh is payable on the relevant transaction.
If the transaction falls within Section 86, both the principal and agent are jointly and severally liable for the tax.
This does not necessarily mean that the same tax is paid twice. It means that the liability can be enforced against either or both liable parties according to the applicable law, with the Government ultimately recovering the amount payable rather than receiving duplicate tax merely because two persons are liable.
Why Does GST Law Make Both Agent and Principal Liable?
Agency arrangements can involve several parties.
The principal may own the goods, while the agent may physically receive, hold, market or supply them.
If GST liability rested exclusively with only one party regardless of the agency arrangement, there could be difficulties in recovery where the relevant transaction and records are handled by the other party.
Section 86 therefore establishes a clear statutory rule: where the agent supplies or receives taxable goods on behalf of the principal, both parties have joint and several liability for the GST payable on those goods.
Example of an Agent Supplying Goods
Suppose ABC Manufacturing appoints XYZ Commission Agency to sell its products.
ABC Manufacturing is the principal.
XYZ Commission Agency acts as the agent and supplies taxable goods on behalf of ABC.
If GST is payable on those taxable goods, Section 86 provides that ABC and XYZ can both be jointly and severally liable for the tax payable on those goods.
The agency agreement does not, by itself, remove the statutory liability created by Section 86.
Example of an Agent Receiving Goods
Section 86 also covers the situation where an agent receives taxable goods on behalf of the principal.
For example, a principal may send taxable goods to an agent for sale, distribution or another business purpose.
Where the agent receives the goods on behalf of the principal, the statutory liability under Section 86 can apply to the GST payable on those goods.
This is important because the provision covers both sides of the agency activity:
Supply by agent → Section 86
Receipt by agent → Section 86
Section 86 and Schedule I
Section 86 should be read alongside Schedule I of the CGST Act, which deals with activities treated as supplies even when made without consideration in specified circumstances.
Schedule I specifically includes:
- supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; and
- supply of goods by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
This is an important connection between the two provisions.
Schedule I determines when certain principal-agent movements of goods are treated as supplies even without consideration, while Section 86 deals with the liability of the agent and principal for tax payable on taxable goods supplied or received by the agent on behalf of the principal.
Example: Principal Sends Goods to Agent
Suppose ABC Ltd. manufactures electronic products.
ABC sends taxable goods to XYZ, its commission agent, for onward supply.
XYZ undertakes to supply the goods on behalf of ABC.
The transaction may have GST consequences under Schedule I, subject to the statutory conditions.
Where the goods are taxable and the requirements of Section 86 are satisfied, both ABC and XYZ can be jointly and severally liable for the tax payable on those goods.
Therefore, the parties must examine both:
- the supply rules; and
- the liability rule.
Is Every Movement of Goods Between Principal and Agent a Taxable Supply?
No.
The GST treatment depends on the statutory conditions.
Schedule I specifically addresses certain supplies between a principal and agent without consideration. CBIC has also issued guidance explaining the scope of the principal-agent relationship for this purpose.
Therefore, businesses should not assume that every physical movement of goods from a principal to an agent automatically results in a taxable supply.
The contractual relationship and the actual nature of the transaction must be examined.
CBIC Clarification on Principal-Agent Relationship
CBIC issued Circular No. 57/31/2018-GST to clarify the scope of the principal-agent relationship under Schedule I, particularly in the context of del-credere agents.
The clarification was issued because representations had been received from trade and industry regarding the scope of the principal-agent relationship under GST.
The circular is useful because it shows that the existence of an agency relationship is not determined merely by the label used by the parties.
The actual arrangement and the relevant activities must be examined.
Del-Credere Agent and GST
A del-credere agent (DCA) is an intermediary who may undertake additional obligations relating to payment or credit risk in transactions between a principal and customers.
CBIC issued Circular No. 57/31/2018-GST and subsequently Circular No. 73/47/2018-GST to clarify the treatment of principal-agent relationships in the context of DCAs.
The existence of additional commercial obligations does not automatically mean that every DCA arrangement creates a principal-agent relationship for every GST purpose.
The actual contractual and commercial arrangement must be examined.
Does Section 86 Apply to Services?
The wording of Section 86 specifically refers to an agent who supplies or receives taxable goods on behalf of the principal.
Therefore, the direct operative language of Section 86 is focused on taxable goods.
This should be distinguished from the broader definitions of “agent” and “principal” under Section 2, which refer to goods or services or both.
Businesses should therefore avoid automatically extending the specific liability rule in Section 86 to every agency service arrangement without examining the relevant GST provisions.
Section 86 and Commission Agents
Commission agents are expressly included within the statutory definition of an agent.
A commission agent generally facilitates the sale or purchase of goods for a principal in return for commission.
Where the commission agent supplies or receives taxable goods on behalf of the principal within the meaning of Section 86, the statutory joint and several liability can arise.
The GST treatment of the commission earned by the agent is a separate issue and should not be confused with the tax payable on the underlying taxable goods.
GST on Commission Earned by an Agent
An agent may separately provide an agency or intermediary service to the principal and receive commission.
The GST treatment of that commission is distinct from the tax payable on the underlying goods.
For example:
- Principal supplies goods through agent.
- GST may be payable on the taxable goods.
- Agent earns commission for providing agency services.
- GST treatment of the commission is considered separately under the applicable provisions.
Section 86 specifically addresses the tax payable on taxable goods supplied or received by the agent on behalf of the principal.
Section 86 and Auctioneers
Auctioneers are expressly included in the statutory definition of “agent.”
An auctioneer may sell goods on behalf of another person.
Where the statutory conditions of Section 86 are satisfied, the agent-principal liability rule can become relevant to the taxable goods involved.
The specific GST treatment of an auction transaction should be determined based on the nature of the transaction and the applicable provisions.
Section 86 and Brokers
A broker can fall within the statutory definition of an agent where the broker carries on the business of supply or receipt of goods or services or both on behalf of another person.
However, merely describing a person as a broker does not by itself determine the GST treatment.
The actual functions performed and the contractual relationship must be examined.
Section 86 and Factors
A factor is specifically included in the statutory definition of “agent.”
Therefore, a factor can potentially fall within Section 86 where the statutory conditions concerning supply or receipt of taxable goods on behalf of the principal are satisfied.
Section 86 and Arhatia
An arhatia is also specifically included within the statutory definition of agent.
Where an arhatia performs the relevant supply or receipt function on behalf of a principal, the Section 86 liability provision can become relevant.
Section 86 Does Not Automatically Apply to Every Intermediary
This is an important practical point.
A business relationship does not automatically become an agency relationship merely because one person facilitates a transaction for another.
The definition in Section 2(5), the contractual arrangement and the actual conduct of the parties should be considered.
CBIC’s principal-agent circulars also demonstrate the importance of examining the actual scope of the relationship rather than relying only on terminology used by the parties.
How Section 86 Works in Practice
A typical transaction can be understood as follows:
Principal
↓ supplies or makes goods available
Agent
↓ supplies goods to customer
Customer
The agent is acting on behalf of the principal.
Where the goods are taxable and the transaction falls within Section 86, both the principal and agent are jointly and severally liable for the GST payable on those goods.
👉 Read More → Section 85 – Liability in case of transfer of business
Example With Tax Calculation
Suppose a principal supplies taxable goods through an agent.
Taxable value of goods = ₹10,00,000
Assume the applicable GST rate is 18%.
GST payable = ₹1,80,000.
If the transaction falls within Section 86, the principal and agent are jointly and severally liable for the ₹1,80,000 GST payable on those goods.
The exact tax rate and tax amount in an actual transaction must, of course, be determined according to the applicable classification, rate and law.
Does Joint and Several Liability Mean Double GST?
No.
Joint and several liability does not mean that the Government should collect the same tax twice.
It means that more than one person can be legally liable for the same underlying tax obligation.
For example, if ₹1 lakh of GST is payable on a taxable transaction covered by Section 86, the Government’s tax claim remains ₹1 lakh, although both the agent and principal may be liable for that amount under the statutory provision.
Can the Principal and Agent Decide Among Themselves Who Will Pay?
They can make contractual arrangements between themselves regarding their respective commercial responsibilities.
For example, an agency agreement may state that the principal will discharge the GST liability.
However, a private contractual arrangement does not automatically remove the statutory joint and several liability imposed by Section 86.
Therefore, a clause in an agency agreement should not be treated as overriding the CGST Act.
The parties may have contractual rights of reimbursement or indemnity between themselves, but those rights are distinct from the Government’s statutory rights.
Importance of Agency Agreement
Businesses using agents should maintain a properly drafted agency agreement.
The agreement should clearly address matters such as:
- identity of principal and agent;
- nature of agency;
- goods covered;
- authority to supply or receive goods;
- ownership of goods;
- invoicing responsibility;
- GST compliance responsibility;
- commission;
- payment terms;
- returns and adjustments;
- record-keeping;
- liability allocation between the parties; and
- termination of the agency.
The agreement cannot override Section 86, but it can help establish the actual commercial relationship between the parties.
Records That Should Be Maintained
An agent and principal dealing with taxable goods should maintain appropriate records, including:
- purchase and sales invoices;
- delivery documents;
- stock records;
- agency agreements;
- commission statements;
- GST returns;
- e-way bills where applicable;
- payment records;
- debit and credit notes;
- correspondence concerning goods;
- records of goods received on behalf of the principal; and
- records of goods supplied on behalf of the principal.
Accurate records are particularly important where the same agent handles goods belonging to multiple principals.
Section 86 and GST Invoices
The parties should carefully determine who is responsible for issuing the relevant GST invoice under the applicable provisions.
Section 86 itself does not establish a complete invoicing framework. It establishes joint and several liability for tax on taxable goods supplied or received by an agent on behalf of the principal.
The invoice requirements must therefore be examined separately under Section 31 and the relevant GST Rules.
Section 86 and Input Tax Credit
Section 86 primarily concerns liability to pay tax.
Input tax credit is governed by separate provisions, particularly Sections 16 and 17 and the relevant rules.
Therefore, an agent should not assume that joint and several liability under Section 86 automatically determines who can claim input tax credit.
The eligibility and documentation for ITC must be examined separately.
Section 86 and GST Registration
Whether the principal and agent are required to obtain GST registration depends on the applicable registration provisions and the nature of their activities.
The existence of an agency relationship does not, by itself, replace the general registration rules.
The parties should consider:
- Section 22;
- Section 23;
- Section 24;
- the nature of supplies;
- turnover;
- applicable notifications; and
- other registration requirements.
Section 86 and Supply Under Schedule I
The relationship between Section 86 and Schedule I is particularly important.
Schedule I treats certain supplies between a principal and agent as supplies even when made without consideration.
Specifically, it covers:
- supply of goods by a principal to an agent where the agent undertakes to supply those goods on behalf of the principal; and
- supply of goods by an agent to the principal where the agent undertakes to receive those goods on behalf of the principal.
Therefore, a principal-agent arrangement involving goods can have GST consequences even where the parties do not charge each other a conventional sale consideration.
Example: Principal-to-Agent Transaction
ABC Ltd. sends goods to XYZ Agency.
XYZ undertakes to supply the goods to customers on behalf of ABC.
If the transaction satisfies the relevant Schedule I conditions, the movement may constitute a supply for GST purposes even without consideration.
Once the relevant supply is taxable, Section 86 becomes relevant to the liability of the principal and agent for the tax payable on those goods.
Example: Agent-to-Principal Transaction
Suppose an agent has undertaken to receive goods on behalf of a principal.
Schedule I specifically recognises the supply of goods by an agent to the principal in the circumstances stated in the Schedule.
The GST consequences must be determined by examining the statutory requirements.
Section 86 then provides the joint and several liability rule where the agent supplies or receives taxable goods on behalf of the principal.
Section 86 and the Value of Supply
The amount of GST payable under Section 86 depends on the taxable value and applicable tax rate determined under the GST law.
Section 86 itself does not establish a special valuation mechanism.
The valuation provisions under Section 15 and the relevant rules must therefore be considered where applicable.
For principal-agent transactions, valuation can become particularly important because the relationship between the parties may affect the applicable valuation provisions.
Related Persons and Principal-Agent Transactions
GST law contains specific valuation provisions concerning transactions between related persons and distinct persons.
A principal and agent relationship can have implications for valuation depending on the facts and applicable provisions.
Therefore, businesses should separately examine:
- whether the parties are related;
- whether the transaction falls under the specific valuation rules;
- whether open market value is relevant;
- whether the transaction is between distinct persons; and
- whether any special valuation rule applies.
Section 86 itself does not replace those valuation provisions.
Section 86 and Del-Credere Agent
The treatment of a del-credere agent has been the subject of CBIC clarification.
Circular No. 73/47/2018-GST was issued following representations concerning the scope of principal-agent relationships in the context of del-credere agents.
The clarification should be considered when determining whether a particular DCA arrangement creates the relevant principal-agent relationship for GST purposes.
The important practical point is that the commercial substance and contractual terms of the arrangement must be examined.
Principal-Agent Relationship: What Should Businesses Check?
Before determining the GST treatment, businesses should examine:
1. Who Owns the Goods?
Ownership can help establish the commercial structure, although ownership alone does not answer every GST question.
2. On Whose Behalf Is the Agent Acting?
This is central to the statutory definitions.
3. Does the Agent Have Authority to Supply or Receive Goods?
This is relevant to determining whether the transaction falls within the wording of Section 86.
4. What Does the Agreement Say?
The agency agreement should clearly establish the relationship.
5. What Happens in Actual Practice?
The actual conduct of the parties should be consistent with the contractual arrangement.
6. Are the Goods Taxable?
Section 86 specifically refers to taxable goods.
7. What GST Registration and Invoicing Rules Apply?
These must be considered separately.
Difference Between Section 86 and Section 85
Section 85 deals with transfer of business, whereas Section 86 deals with agent and principal liability.
| Basis | Section 85 | Section 86 |
|---|---|---|
| Main subject | Transfer of business | Agent and principal |
| Main persons | Transferor and transferee | Agent and principal |
| Key liability | Pre-transfer tax, interest and penalty | Tax payable on taxable goods |
| Joint and several liability | Yes | Yes |
| Business transfer required | Yes | No |
| Agency relationship required | No | Yes |
Difference Between Section 86 and Section 87
Section 87 deals with liability in cases involving amalgamation or merger of companies.
Section 86 deals with the liability of an agent and principal for taxable goods supplied or received by the agent on behalf of the principal.
These provisions address completely different business situations.
Difference Between Section 86 and Section 89
Section 89 deals with the liability of directors of a private company where specified tax, interest or penalty cannot be recovered from the company.
Section 86 concerns agency relationships and taxable goods.
The persons and statutory conditions are therefore different.
Common Misunderstandings About Section 86
An Agent Is Always the Only Person Responsible for GST
No.
Section 86 expressly makes the agent and principal jointly and severally liable where its conditions are satisfied.
The Principal Is Always the Only Person Responsible
Not necessarily.
The agent can also be jointly and severally liable for the tax payable on taxable goods covered by Section 86.
Every Broker Automatically Becomes Liable Under Section 86
No.
The statutory definition and the actual nature of the relationship must be examined.
Section 86 Applies to Every Service Provided by an Agent
The operative wording of Section 86 specifically refers to an agent supplying or receiving taxable goods on behalf of the principal.
The GST treatment of agency services themselves must be considered under the relevant provisions.
A Private Contract Can Remove Section 86 Liability
A contract can allocate commercial responsibility between the parties, but it does not automatically override statutory liability imposed by the CGST Act.
Practical Compliance Checklist for Principals
A principal using agents should:
- maintain written agency agreements;
- identify all agents handling taxable goods;
- maintain records of goods sent to agents;
- reconcile goods received back from agents;
- reconcile sales made through agents;
- ensure correct GST invoicing;
- monitor GST returns;
- verify tax payment;
- maintain e-way bill records where applicable;
- review Schedule I implications; and
- periodically reconcile agent records with the principal’s books.
Practical Compliance Checklist for Agents
An agent handling taxable goods should:
- maintain a list of principals;
- maintain separate records of goods received;
- maintain records of goods supplied;
- preserve agency agreements;
- reconcile stock;
- maintain invoice records;
- comply with GST return requirements;
- preserve e-way bill documentation where applicable;
- reconcile commission income separately; and
- understand that Section 86 can create direct tax liability for the agent.
Why Section 86 Matters in Business Transactions
Section 86 is particularly important for businesses that use:
- commission agents;
- distributors acting in an agency capacity;
- auctioneers;
- brokers;
- factors;
- arhatias;
- del-credere agents; and
- other mercantile agents.
The parties should understand that agency arrangements can create statutory GST consequences beyond the contractual payment of commission.
Key Points to Remember About Section 86
The most important points are:
- Section 86 is titled “Liability of agent and principal.”
- It contains one operative subsection.
- It applies where an agent supplies or receives taxable goods on behalf of a principal.
- The agent and principal are jointly and severally liable for the tax payable on those goods.
- The definition of agent includes factors, brokers, commission agents, arhatias, del-credere agents, auctioneers and other mercantile agents meeting the statutory definition.
- The principal is the person on whose behalf the agent carries on the business of supply or receipt.
- Section 86 should be read with Schedule I.
- Schedule I contains specific principal-agent transactions that can be treated as supplies even without consideration.
- CBIC has issued circulars clarifying the scope of principal-agent relationships, including del-credere arrangements.
- Joint and several liability does not mean that the same GST is collected twice.
- A private agreement between principal and agent does not automatically override the statutory liability created by Section 86.
- The GST treatment of agency commission is separate from the tax payable on the underlying taxable goods.
- Section 86 should not automatically be extended to every intermediary or every agency service without examining the statutory requirements.
👉 Read More → Section 88 – Liability in case of company in liquidation
Conclusion
Section 86 of the CGST Act, 2017 establishes an important liability rule for transactions involving agents and principals.
Where an agent supplies or receives taxable goods on behalf of a principal, the agent and principal are jointly and severally liable to pay the GST payable on those goods under the CGST Act.
The provision is important because it prevents the agency structure itself from creating uncertainty regarding payment of GST. Both parties can have statutory liability even if their private agreement allocates responsibility for tax payments differently.
To understand Section 86 properly, it is also necessary to examine the statutory definitions of agent and principal and the provisions of Schedule I. Schedule I specifically addresses certain supplies of goods between a principal and agent, including specified transactions where there is no consideration.
CBIC has also issued specific clarifications concerning the scope of principal-agent relationships, particularly in the context of del-credere agents. These clarifications demonstrate the importance of examining the actual contractual and commercial relationship rather than relying only on the terminology used by the parties.
For businesses, the practical lesson is that principal-agent arrangements involving taxable goods should be properly documented and supported by accurate records of goods received, goods supplied, invoices, GST returns, stock movements and tax payments. Both the principal and agent should understand their potential statutory liability rather than assuming that the responsibility rests exclusively with one party.
Frequently Asked Questions About Section 86 of the CGST Act
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