1. Delete the term ‘open market value’ from Valuation Rules
Draft Valuation Rules introduces a new concept of ‘open market value’, to be the first value to be applied in case a transaction does not satisfy the requirements of section 15.
It is a new and untested concept and is not even based on a well-developed law or international convention. The overlap of open market value (OMV) with the next concept of ‘like kind and quality’ has potential to lead to litigation. Further, OMV does not all adjustments for demonstrable differences on account of variations on account of commercial circumstances of the transaction in question versus transaction of OMV. Due to the absoluteness of OMV, it can lead to sub-optimal results in resolving valuation disputes/differences. Lastly, recourse of other sub-rules is possible only is ‘OMV is not determinable’ which is an insurmountable hurdle.
The value arrived at based on ‘like kind and quality’ does not suffer from the deficiencies noted above in the case of OMV. Hence, valuation based on ‘like kind and quality’ will yield better results due to the permissibility of qualitative adjustments permitted in this provision. Also, similar phrase used in Customs Valuation (for Determination of Price of Imported Goods) Rules, 2007 has addressed many valuation disputes/differences at the assessment level itself.
It is suggested the concept of Open Market Value be done away with from the Valuation Rules entirely and instead valuation based on ‘like kind and quality’be provided for.
An alternative for goods is that as Central Excise Valuation Rules are now settled, they be applied.
2. Value of supply in case of supply between distinct persons or related persons
Rule 2 provides for a mechanism to arrive at a value in case of distinct persons and related persons by following the same options as available in Rule 1.
While supply between distinct persons being covered by this rule is workable, supply between ‘related persons’may be excluded from this rule. When a supply is between related persons, the issue is regarding extraneous consideration flowing between them and as such, Rule 1 alone may be sufficient to address this issue. By including ‘related persons’also in Rule 2, the availability of this rule will attract all related party supplies to be dragged into valuation review without establishing that there is some extraneous consideration defeating section 15. And if extraneous consideration is established, then Rule 1 is sufficient.
Also, the relief from proviso to Rule 2 is adequate for valuation between distinct persons and not in the case of related persons.
It is suggested the term ‘related persons’be removed from the scope of Rule 2.
3. Determination of value in respect of certain supplies
Rule 6 of draft GST Valuation Rules provides for different mechanisms for valuation in various cases like value of supply of services in relation to purchase or sale of foreign currency, including money changing, booking of tickets for travel by air provided by an air travel agent, in relation to life insurance business, buying and selling of second hand goods, value of a token, or a voucher, or a coupon, or a stamp (other than postage stamp) which is redeemable against a supply of goods or services or both etc.
The non-obstante clause overrides the ‘Act’itself and this would be an overuse of the scope of Rules. Also, by declaring that the value under Rule 6 will be the value for GST, it discards the taxable person’s right to pay tax based on actual transaction value.
For example: In the case of a token or voucher, the amount paid for voucher can be lesser than the redeemable value as the transaction involves intermediaries. Since, every taxable person would be liable to pay tax even in case of vouchers; the redeemable value need not always be the actual transaction value. Tax on the difference between the cumulative amount paid and the redeemable value, if any, can be paid on redemption. If not, tax will be zero or negative in the hands of intermediaries.
It is suggested that:
- The words “notwithstanding anything contained in the Act”be removed from Rule 6 and instead the words “taxable person may opt to pay tax on the value determined under this rule”be used in its place.
- Further, in sub-rule 6 –‘value of a token …………be the amount actually paid for the token and not the redeemable value of the goods or services or both….’
4. Value in case of Pure Agent
Rule 7 of draft GST Valuation Rules provides that the expenditure or costs incurred by the supplier as a pure agent of the recipient of supply of services shall be excluded from the value of supply if the following conditions are satisfied:
The Institute of Chartered Accountants of India Suggestions on Draft GST Rules
(i) the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party for the services procured as the contract for supply made by third party is between third party and the recipient of supply;
(ii) the recipient of supply uses the services so procured by the supplier service provider in his capacity as pure agent of the recipient of supply;
(iii) the recipient of supply is liable to make payment to the third party;
(iv) the recipient of supply authorises the supplier to make payment on his behalf;
(v) the recipient of supply knows that the services for which payment has been made by the supplier shall be provided by the third party;
(vi) the payment made by the supplier on behalf of the recipient of supply has been separately indicated in the invoice issued by the supplier to the recipient of service;
(vii) the supplier recovers from the recipient of supply only such amount as has been paid by him to the third party; and
(viii) the services procured by the supplier from the third party as a pure agent of the recipient of supply are in addition to the supply he provides on his own account.
The aforesaid eight clauses need to be simplified in order to avoid litigation. For example, clause (i) will never be satisfied because there will be no contract available to prove that instructions to act as pure agent are issued. An inference may be drawn to provide that a existence of a contract is mandatory which might not be the intention of the law.
If this rule is meant for only statutory and fee payments then this be made clear.
If not, it is suggested that the aforesaid conditions to verify the expenditure or costs incurred by the supplier as a pure agent be reconsidered especially clauses (i), (iv) and (vii).
5. Rate of exchange of currency
Rule 8 of draft GST valuation Rules provides that the rate of exchange for determination of 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 when point of taxation arises in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.
The rules make a reference to the ‘point of taxation’ and such the concept of Point of Taxation does not exist in GST.
It is suggested the words “point of taxation” be replaced with the words time of supply
6. Manner to determine Value of Reputation of a Product
Explanation (b) to Rule 8 to draft GST Valuation Rules provide that “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 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.
The definition terH “PLI pVy Sf goL1 s or JervicesLI r both 1f tike kind Gnd quGIitR” considers OveW reputation to be comparable. There is no uniform formula for measuring the value of reputation which varies from market to market and product to product. These terms are imported from customs valuation rules, which may not suit for GST levy. It may lead to many litigations and issues of frivolous notices.
It is suggested that the Rules be amended to bring interpretative notes to explain how the value reputation of the product is determined.
7. Value of supply of services in relation to purchase or sale of foreign currency, including money changing
Rule 6(2) of draft GST Valuation Rules provides that the value of supply of services in relation to purchase or sale of foreign currency, including money changing, shall be determined by the supplier of service in the following manner: –
(a) For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time, multiplied by the total units of currency.
(b) At the option of supplier of services, the value in relation to supply of foreign currency, including money changing, shall be deemed to be
(i) one per cent. of the gross amount of currency exchanged for an amount up to one lakh rupees, subject to a minimum amount of two hundred and fifty rupees;
(ii) one thousand rupees and half of a per cent. of the gross amount of currency exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees; and
(iii) five thousand rupees and one tenth of a per cent. of the gross amount of currency exchanged for an amount exceeding ten lakh rupees, subject to maximum amount of sixty thousand rupees
The Rule has no provision for an authorised foreign exchange dealer or money changer to pay tax on commission earned and hence actual ‘transaction value’is rejected. The basic principle of GST levy is to accept the transaction value as long as the transaction is at arms’length and applying the service tax valuation rules here deviates from the basic GST principles.
It is suggested that there be made a provision for an authorised foreign exchange dealer or money changer to pay tax on commission earned being the actual transaction value.
8. Value of supply of services in relation to life insurance business
Rule 6(4) of draft GST Valuation Rules provides that 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 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% of single premium charged from the policy holder; or
(c) in all other cases, 25% per cent. of the premium charged from the policy holder in the first year and twelve and a half per cent. of the premium charged from policy holder in subsequent years:
Provided that nothing contained in this sub-rule shall apply where the entire premium paid by the policy holder is only towards the risk cover in life insurance.
The rules in the case of Single premium annuity policy and Life insurance policy with investment portion has put the composition rate at 25% and 10% respectively from 1.4% and 3.5% for first year and 1.75 % from second year onwards for the respective policies under service tax. When service tax rate was 14% the composition rate was 1.4% and 3.5% for first year and 1.75 % from second year and when the expected GST rate is 18% for such services it seems the rate has no rationale.
It is suggested that rates of 10% & 25% be rationalised and brought at par with the rates fixed up under service tax valuation rules. For example if GST rate is 18% for said services the composition rate may be 1.8% for the first year etc.
9. Illustration required in Rule 6(5) of Determination of Value of Supply Rules
Rule 6(5) of draft GST Determination of Value of Supply Rules provides for method of valuation in case of supply of second hand goods.
(5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e. used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on purchase of such goods, the value of supply shall be the difference between the selling price and purchase price and where the value of such supply is negative it shall be ignored.
To enable the public at large to understand an illustration be inserted in this rule as done in case of various other rules.