Valuation of Supply: GST Rules

Introduction

GST is applicable on ad valorem basis, therefore valuation of supply become very important aspect and one of the most analytical and disputed aspect. It will always be open for regulators to raise doubt on the valuation of supply.

Indirect taxation always provided broad guidelines to ascertain the value of goods/services subject to the taxation. These guiding principles have been made very objectively to remove doubt and future disputes among regulators and assessees. In the prior regime, under Excise, Service Tax etc there was also valuation principles and GST has adopted same principle of valuation.

Legal framework

Under GST framework, valuation principles are given under Section 15(1) of CGST and SGST Acts and where the value cannot be determined under sec l5(1), then it shall be determined in the manner prescribed in the Rules 27 to 35 GST Rules, 2017.

1. Transaction Value cardinal principle

The value of a supply of goods or services or both shall be the Transaction Value, that is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply - section 15(1) of CGST and SGST Act.

1.1 Two conditions for accepting Transaction Value for valuation – Two cumulative conditions for accepting transaction value are –

(a) supplier and recipient should not be related; and

(b) price is sole consideration.

If any of the two conditions are not satisfied the valuation shall be done in accordance to the principals laid down under the GST Rules, 2017 (Rules 27 to 35).

1.1.1 Related person:

Relative persons are generally those who have ability to exercise influence on each other by way of controlling other’s decisions. They can entered into an arrangement in such a manner by which the transaction value be manipulated against the interest of revenue.

In CCE v Xerographic Ltd. (2010) 257 ELT ll (SC), Hon'ble Supreme Court observed that before invoking related party concept, following 3 conditions should be satisfied cumulatively.

(a) Mutuality of interest,

(b) Related person as defined in statutory provisions, and

1.1.2 Legal provisions

Explanation of section 15 clarified the situation where two party shall be considered as a related party, the situations are following:

Persons shall be deemed to be “related persons” if––

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognised partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or

(viii) they are members of the same family;

(ix) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

1.1.3 Inclusion and exclusion while computing Transaction Value

Inclusion

There are five inclusions are mentioned under Section 15(2) which are as below:

a. Taxes, duties, cesses, fees and charges levied under any law for the time being in force other than GST, if charged separately by the supplier;

b. Amount incurred by the recipient on behalf of supplier and not included in the price actually paid or payable for the supply;

c. Incidental expenses,

The incidental expenses includes:

· Commission and packing,

Amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services

d. Interest or late fee or penalty for delayed payment of any consideration for any supply; and

e. Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Exclusion

Discount shall not be included in Transaction Value where it is given––

(a) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) After the supply has been effected, if the following two cumulative conditions satisfies:

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

2. Valuation as per Rules 27 to 35 of Central Goods and Services Rules, 2017

Section 15(4) and 15(5) provides under the following circumstances the valuation shall be done in accordance with Rules 27 to 35 of the Central GST Rules, 2017.

a. Where the Transaction Value of the supply cannot be determined; [Rule 27 to 31] and

b. Where the valuation method is specified for certain notified supplies [Rule 32]

2.1 Arrangement of Rules

Rules 27 to 31 providing valuation guidance where the valuation cannot be done in accordance with Section 15(1);
Rule 32 provides list of services and their valuation principles;
Rule 33 deals with the determination of value of supply of services in the case of pure agent;
Rules 34 and 35 deals with foreign exchange transactions and inclusive tax issues respectively.

2.1.1 Where the price is not sole consideration

Rule 27:Value of supply of goods or services where the consideration is not wholly in money

Rule 27 provides four different valuation methods in hierarchical orders, wherein the valuation is cannot be determined by the 1st method then 2nd method will be applied and if the methods 1st and 2nd do not is fit in the given instance then 3rd method is applicable and where method 1, 2 and 3 cannot be applied then the value shall be determined method 4 shall be applicable.

First Method : Open market value;
Second Method :[Consideration in money] + [any such further amount in money as is equivalent to the consideration not in money, if such amount is know at the time of supply];

“The second method is applicable only if the amount in money as equivalent to the consideration not in money is knows at the time of supply”.

Third Method: Value of supply of goods or services or both of like kind and quality;
Fourth Method: [Consideration in money]+[such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order].

“Open Market Value”

The explanation of Rule 35 provides the definition of Open Market Value as under:

“Open market value” of a supply of goods or services or both means the full value in money, excluding the GST and cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

Note: Ascertain ‘open market value’ of a goods is easier but applying the principal of ‘open market value’ in respect to the services is a big challenge as a charging for a service is a subjective thing, as there is no standard for charging fees from customer.

Value of Supply of ‘Like Kind and Quality’

The explanation (b) of Rule 35 provides the definition of Like Kind and Quality as under:

“Supply of Goods or Services or Both of Like Kind and Quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.

Illustration:

(1) Where a new phone is supplied for twenty thousand rupees along with the exchange of an old phone and if the price of the new phone without exchange is twenty four thousand rupees, the open market value of the new phone is twenty four thousand rupees.

(2) Where a laptop is supplied for forty thousand rupees along with the barter of a printer that is manufactured by the recipient and the value of the printer known at the time of supply is four thousand rupees but the open market value of the laptop is not known, the value of the supply of the laptop is forty four thousand rupees.

2.1.2 When the supply between distinct or related person

Rule 28: Value of supply of goods or services or both between distinct or related persons, other than through an agent

This rule applies only in following cases

(a) Distinct person

(b) Related person.

Distinct person:

Distinct persons are the persons as specified in section 25(4) and 25(5) of CGST Act i.e. where persons with single PAN has taken separate registration in different States or even in the same State for different verticals.

“Where the supply made through an agent, this rule shall not be applicable”.

Valuation of supply:

The value of the supply of goods or services or both shall-

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

2.1.3 Where the goods made or received through an agent

Rule 29: Value of supply of goods made or received through an agent

Agent

Section 2(5) of CGST/SGST Act, 2017, defines “Agent” means a person, including a factor, broker, commission agent, arhatia, del-credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;

Thus an agent is a person who carries on the business of supply or receipt of goods or services or both on behalf of another.

Valuation of supply:

The value of supply of goods between the principal and his agent shall-

(a) be the open market value of the goods being supplied, or at the option of the supplier, be ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient.

(b) where the value of a supply is not determinable under clause (a), the same shall be determined by the application of rule 30 or rule 31 in that order.

Illustration: A principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of Rs. 5,000/- per quintal on the day of the supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of Rs. 4,550/- per quintal. The value of the supply made by the principal shall be Rs. 4550/- per quintal or where he exercises the option, the value shall be 90 percent of Rs. 5000/- i.e., Rs. 4500/- per quintal.

2.1.4 Cost-Plus Method

Rule 30 Value of supply of goods or services or both based on cost

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Note: this rule is an optional for supply of Service, a service provider, need not to adopt cost plus method, in case the valuation of service cannot be determined under Rules 27 to 29, in such case the service provider opt for residual method of valuation.

2.1.5 Residual Method

Rule 31: Residual method for determination of value of supply of goods or services or both

Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter.

Provided that in the case of supply of services, the supplier may opt for this rule, ignoring Rule 30.

2.1.6 Notified Supply

Rule 32: Determination of value in respect of certain supplies. [Optional]

Rule 32 specified five services whose valuation shall be which valuation at the option of supplier, shall be determined in the manner given under respective sub rules.

(I) Money Changer and related Services

(a) The value of supply of services in relation to the purchase or sale of foreign currency, including money changing, shall be determined by the supplier of services in the following manner, namely:-

(i) for a currency, when exchanged from, or to, Indian Rupees, the value shall be equal to the difference in the buying rate or the selling rate

(ii) where the Reserve Bank of India reference rate for a currency is not available, the value shall be one percent of the gross amount of Indian Rupees provided or received by the person changing the money

(iii) where neither of the currencies exchanged is Indian Rupees, the value shall be equal to one percent of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by the Reserve Bank of India.

(b) At the option of the supplier of services, the value in relation to the supply of foreign currency, including money changing, shall be deemed to be-

(II) Air Ticketing Services

The value of the supply of services in relation to booking of tickets for travel by air :

@ 5% percent of the basic fare in the case of domestic bookings, and

@10% of the basic fare in the case of international bookings

Basic Fare: Part of the air fare on which commission is normally paid to the air travel agent by the airlines.

(III) Life Insurance Business

The value of supply of services in relation to life insurance business shall be-

(a) the gross premium charged from a policy holder reduced by the amount allocated for investment, or savings on behalf of the policy holder, if such an amount is intimated to the policy holder at the time of supply of service;

(b) in case of single premium annuity policies other than (a), 10% percent of single premium charged from the policy holder; or

(c) in all other cases, 25% of the premium charged from the policy holder in the first year and 12.5% of the premium charged from the policy holder in subsequent years:

This valuation rule shall not be apply where, the entire premium paid by the policy holder is only towards the risk cover in life insurance.

(IV) Buying and Selling of Second-Hand Goods

Where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

Value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

(V) The value of a token, or a voucher, or a coupon etc.

The value of a token etc. which is redeemable against a supply of goods or services or both shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.

(VI) The value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in section 25, where input tax credit is available, shall be deemed to be NIL.

2.1.7 Supply of Services by Pure Agent

Rule 33: Value of supply of services in case of pure agent

In common practice, suppliers incur some expenditure on behalf of recipients and then recover the amount from them, these expenditures are not part of value of supply provided by them to service recipients, but is incurred by them as per business practice or convenience.

Following are some example of expenditure incurred as pure agent by suppliers:

Outward transport charges paid on behalf of recipient.
Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
RoC Fees paid by CA/CS/CMAs on behalf of client during incorporation of company;
Ticket charges paid by Travel Agent to railways or airlines and recovered from his customer.

Pure Agent:

The charters of a pure agent are determine by its following characteristics under a transaction:

a. The person enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

b. The person neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;

c. The person does not use for his own interest such goods or services so procured; and

d. The person receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

Valuation

While determining the value of supply, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

2.1.8 Exchange Rate

Rule 34: Rate of exchange of currency, other than Indian rupees, for determination of value

The rate of exchange for the determination of the value of taxable goods or services or both shall be the applicable reference rate for that currency as determined by the Reserve Bank of India on the date of time of supply in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.

2.1.9 Valuation includes Taxes paid under GST Laws

Rule 35: Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax

Where the value of supply is inclusive of integrated tax or, as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, namely,-

Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) ÷ (100+ sum of tax rates, as applicable, in %)

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