A commission-based business can take many forms. A person may introduce buyers to a supplier, find customers for a manufacturer, arrange property leads, act as a sales agent or earn a percentage when a transaction is completed. Because the business may not own the goods being sold, new entrepreneurs sometimes assume that normal business and tax rules do not apply.
A commission-based business is legal in India when the underlying activity is lawful and the person follows the rules that apply to the particular role. There is no general prohibition on earning commission. The important questions are what service is being provided, whether the person is acting as an agent on behalf of another business, and whether the sector requires a separate registration or licence.
The word “commission” alone is therefore not enough to determine compliance. A simple referral arrangement and a regulated financial intermediary may both be paid a percentage, but their legal obligations can be very different.
Define What the Business Is Actually Being Paid For
Start by describing the service in one sentence. For example, “I introduce potential customers and receive a fee when a sale is completed” is different from “I enter into sales on behalf of the supplier and collect money from customers.”
This distinction matters for contracts, tax and liability. Under GST law, an agent can include a broker, commission agent or other mercantile agent who carries on the business of supply or receipt of goods or services on behalf of another person. Certain agents who make taxable supplies on behalf of other taxable persons can fall within compulsory GST registration provisions.
A person who merely provides independent marketing or lead-generation services may have a different position. Do not adopt the label “commission agent” simply because payment is calculated as a percentage.
A written agreement should state what the person is authorised to do and, equally importantly, what the person is not authorised to do.
Check Whether the Sector Requires a Separate Registration
Commission arrangements appear in both ordinary and heavily regulated industries. A general business registration does not give a person permission to act as an intermediary in every sector.
Examples requiring extra attention include real-estate brokerage, insurance distribution, securities and investment activity, certain financial services and other regulated professions. The applicable regulator may prescribe qualifications, registration, disclosures or limits on how business can be solicited.
Before advertising a commission service, ask:
- Am I only introducing the parties, or negotiating for one of them?
- Am I allowed to receive customer money?
- Does the sector require an individual or entity registration?
- Are there restrictions on advertising, promises or commission sharing?
- Must the customer be told who pays my commission?
If the answer depends on a sector regulator, check that regulator’s current rules rather than relying on the fact that another type of commission business can operate without the same licence.
GST Treatment Depends on the Real Transaction
Commission and brokerage are commonly treated as consideration for services, but the GST result depends on the actual arrangement. The general registration threshold for service providers is based on aggregate turnover, subject to the lower threshold and special provisions that apply in specified cases.
Compulsory registration also requires attention. Section 24 of the CGST Act includes persons who make taxable supplies of goods or services on behalf of other taxable persons as an agent or otherwise. This does not mean that every person who earns a referral fee automatically becomes such an agent. The authority given to the person and the way the transaction is carried out matter.
Keep the contract consistent with invoices and actual conduct. A document that calls someone an “independent consultant” will not necessarily decide the issue if the person is in practice concluding supplies on another business’s behalf.
If a business works for clients in several states or provides services through online platforms, check the place-of-supply and registration position instead of assuming that the client’s address alone decides the tax treatment.
TDS on Commission Is Different From GST
Income-tax deduction at source is another area that often causes confusion. Section 194H deals with commission or brokerage in specified circumstances. From 1 April 2025, the threshold under that section is Rs. 20,000, and the applicable TDS rate is 2 per cent under the current provision, subject to the section’s conditions and exclusions.
The obligation to deduct usually concerns the person paying the commission when the statutory conditions apply. TDS is not an additional fee that the commission earner can simply ignore, nor does deduction by the payer settle every income-tax obligation of the recipient.
Insurance commission and some other payments are dealt with under separate provisions, so do not force every percentage-based payment into section 194H without checking the nature of the income.
Maintain commission statements showing the transaction, gross commission, deductions and net payment. Reconcile them with tax certificates and bank receipts rather than trying to reconstruct the figures at year end.
Put the Commission Formula in Writing
Many disputes in this type of business are commercial rather than regulatory. A seller thinks commission is payable only after full customer payment, while the agent believes it became due when the order was booked. A refund arrives later and neither party knows whether the commission must be reversed.
A useful agreement should cover:
- The transactions that qualify for commission.
- The percentage or fixed amount and the value on which it is calculated.
- When commission becomes due.
- Treatment of GST and tax deductions.
- Returns, cancellations, bad debts and chargebacks.
- Territory, customer ownership and repeat orders.
- Duration, termination and payment of outstanding commission.
For high-value business, include a method for checking the sales data on which the commission is calculated. Clear records protect both the principal and the commission earner.
Do Not Make Promises Beyond Your Authority
A commission earner may be eager to secure a sale, but statements made to a customer can create problems for the principal and the intermediary. Do not invent discounts, guarantees, delivery dates or investment returns merely to close a transaction.
If the business only introduces leads, make that role clear. Do not collect deposits or sign documents in another company’s name unless the agreement and applicable law permit it.
Conflicts of interest also deserve attention. Where a customer reasonably expects independent advice, an undisclosed commission can affect trust and may be restricted by sector-specific rules. Follow the disclosure duties that apply to the particular industry.
Keep Evidence of Each Referral or Sale
A commission business often depends on proving who introduced a customer. Use a consistent lead-registration or order-reference system instead of relying on phone calls and memory.
Keep agreements, emails, lead records, invoices, payment statements, tax documents and evidence of cancellations. Avoid cash arrangements that cannot be reconciled with the business accounts.
A commission-based business can therefore operate legally in India, but the safest approach is to define the role before chasing sales. The fact that income is called commission does not remove GST, income-tax or sector-specific requirements. A clear contract, accurate records and a strict boundary around what the intermediary is authorised to do provide a much stronger foundation than a verbal promise to “pay a percentage if the deal happens.”
