GST Law is the biggest indirect tax reforms in India after Independence which is going to impact one and all, right from the business fraternity to a common men. The Model GST Law is already released which gives us an opportunity to analyse various draft provisions beforehand and give suggestions for a better law.
The Model GST Lawinter-alia includes GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016, (hereinafter referred as ‘the Valuation Rules’). The ‘valuation’ is an important aspect because of its significant financial implications and the fact that so far it has been a litigation prone area.
Section 15 of the Model GST Law read with the Valuation Rules provides for valuation of supply of goods and services based on ‘transaction value’ and the Valuation Rules to be referred in specified cases or in cases where‘transaction value’ cannot be applied.A brief of the same is as under.
Generally the transaction value shall be the value of taxable supply which is the price actually paid or payable,if the supplier and recipient are not related person and the price is sole consideration for the supply
Inclusions:Following amounts shall be included to ascertain the transaction value:
a. Amount incurred by recipient and not included in price which the supplier is liable to pay;
b. Appropriate value of goods, services supplied by recipient free of charge or at a reduced cost to the extent that such value is not included in the price;
c. Royalty and licence fees related to the supply which the recipient must pay as a condition in connection with the subject supply to the extent not included in the price;
d. Any duties, taxes, fees and charges other than under the SGST Act, CGST Act orIGST Act;
e. Incidental expenses like commission and packing, etc, charged by supplier.
f. Subsidies in any form with respect to Supply;
g. Any reimbursable expenditure or cost incurred by or on behalf of supplier and charged in relation to the supply.
h. Any discount or incentive that may be allowed after the supply is effected. However, the post-supply discount as per the agreement which is known at or before the time of supply and specifically linked to relevant invoices, shall not be included.
Exclusions: Any discount allowed before or at the time of supply as a normal trade practice and duly recorded in the invoice shall be excluded in valuation.
Methods of valuation under the Valuation Rules
In case the supply consist of both taxable and non-taxable supply, the consideration attributable to the taxable supply shall be the value of supply.
The transaction value shall be accepted in case the supplier and the recipient are related person but the relationship has not influenced the price.
In case the goods are transferred from one place of business to another place of same business or from principal to agent or vice versa, the value of supply shall be the transaction value. Here it is pertinent to note that stock transfer does not involve consideration and presently it is liable to excise duty but not sales tax. However, provisions under section 3(1)(c ) read with Schedule I of the Model GST Law brings the transactions of stock transfer under the ambit of ‘Supply’.
Under following situations the valuation shall be determined under the rule 4 to 6 of the Valuation Rules according to the valuation methods discussed below.
i. The consideration is not monetary, wholly or partly.
j. Supplier and recipient are related
k. There is a reason to doubt accuracy of transaction value declared by the supplier
i. Business transactions by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery.
m. Other supplies as may be notified.
a. Comparison Method (rule 4)
Under the comparison method of valuation the value is determined based on transaction value of supply of identical nature, quality, kind and reputation at the same time to other customers as adjusted reasonably by taking into consideration the relevant factors like difference in dates of supply, difference in commercial or quantity levels, difference in composition, quality, design of the subject supply with the supply with whom it is compared.
b. Computed Method (rule 5)
Where the value cannot be determined under the comparison method, the computed value shall be used which means, the value is computed by adding
i) the cost of production, manufacture, processing of goods or provision of services;
ii) Charges for design or brand;
iii) An amount of profit and general expenses usually reflected in the supply of the same class.
c. Residual Method (rule 6)
Where the valuation cannot be determined as per above referred methods, the value shall be determined using reasonable means consistent with the principles and provisions under the Valuation Rules.
Related persons has been defined under section 2(82) as, Persons shall be deemed to be “related persons’’ if only –
(a) they are officers or directors of one another’s businesses;
(b) the y are legally recognized partners in business;
(c) they are employer and employee;
(d) any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;
(e) one of them directly or indirectly controls the other;
(f) both of them are directly or indirectly controlled by a third person;
(g) together they directly or indirectly control a third person; or
(h) they are members of the same family;
Explanation I. – The term “person” also includes legal persons.
Explanation II. – 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.
Valuation in case of Pure Agent: Pure Agent is a person who –
a) Enters into contractual agreement with the recipient of service to act as his pure agent to incur costs in course of providing taxable service
b) Neither intends to hold nor holds any title to goods or services, nor uses the same.
c) Receives only the actual amount incurred to procure the goods or services.
From the value of supply, the expenditure or costs incurred by a Pure Agent (service provider) shall be excluded if following conditions are satisfied –
a. The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or service procured
b. The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as a pure agent of the recipient of service.
c. The recipient of service is liable to make payment to the third party.
d. The recipient of service authorises the service provider to make payment on his behalf.
e. The recipient of service knows that the services shall be provided by third party.
f. The payment made by the service provider on behalf of recipient has been separately indicated in invoice issued by the service provider.
g. The service provider recovers from the recipient only such amount equal to the payment made by him to third party.
h. The goods or service procured by the service provider from the third party as a pure agent of the recipient are in addition to the services he provides on his own account.
Valuation in case of Money Changer services
In case of sale and purchase of foreign currency the consideration of money changer is included in the selling / buying rates. Valuation of the services in such cases shall be determined as under –
i. Value of services shall be equal to the difference between selling / buying rate and the RBI reference rate multiplied by total units of currency.
ii. If RBI reference rate is not available, value shall be 1% of gross amount of Indian rupees provided or received by the person changing the money.
iii. If neither of the currencies exchanged in Indian rupees, the value shall be equal to 1% of the lesser of the two amounts the person would have received by converting any of two currencies into Indian Rupees on that day at the reference rate provided by RBI.
As is expected from the new GST regime that it will bring uniformity, simplification to tax management and eventually higher GDP growth, yet there seems to be so many challenges ahead in view the vast applicability of GST law and diversified administrative agencies across the states.
(Author is CMA, CS, LLM and can be reached at email@example.com)