BRIEF: GST is payable on value of supply under GST Law. The value of supply of goods or services or both is the Transaction Value determined in a prescribed manner including certain expenses and excluding discounts etc subject to conditions. In order to pay due taxes, taxpayers / professionals should have a clear understanding of the provisions of Section 15 and Rules prescribed there under to arrive at the proper value of supply and to avoid future litigation. This article elucidates the aspects of valuation in a simple and meaningful language along with illustrations, Circulars issued by CBIC, Advance Rulings etc while analysing Section 15 of CGST Act, 2017.
1. Introduction :
Every taxable person is liable to pay GST on supply of goods or services or both on the value to be determined as per section 15 of the CGST Act, 2017. GST Law has adopted the concept of Transaction Value on which tax is payable by the taxable person. Section 15 of CGST ACT, 2017 provides for the meaning of Transaction Value and certain expenses to be included or excluded to arrive at this value. It also provides that Govt. may notify certain supplies value of which shall be determined in the prescribed manner on the recommendations of the GST Council. In addition, Rule 27 to 35 prescribed the method to determine the value of supplies in specific circumstances.
In this article, an attempt is being made to explain the concept of transactional value and how to arrive at this value with the help of Rules where ever required so as to enable the tax payer to discharge his correct tax liability.
2. Related definitions
The terms like Transaction Value, Price, Money, Related Persons and Sole consideration have been used in section 15 which are explained below:
Transaction –The term Transaction has not been defined in the CGST Act. Therefore, we will go by its dictionary meaning which is-an instance of buying or selling something.
Price – The term Price has also not been defined under CGST ACT.Therefore, we will go by its dictionary meaning which is- the amount in money expected, required, or given in payment for something.
Money has been defined in section 2(75) of CGST Act as – Money means the Indian legal tender or any foreign currency, Cheque, Promissory Note, Bill of Exchange, Letter of Credit, Draft, Pay Order, Traveller Cheque, Money Order, Postal Order or ElectronicRemittance, or any other instrument, recognised by RBI when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic( means collection of coins, banknotes ) value.
Related Person is defined in the explanation of section 15 itself and states –
a) Person shall be deemed to be a related person if:
i. such persons are officers or directors of one another’s business;
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 25% 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 control directly or indirectly a third person; or
viii. they are members of the same family;
b) the term person also includes legal person;
c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, however described, of the other, shall be deemed to be related.
Having read the above definitions, we now analyse section 15 to determine value of supply as under:
3.VALUE OF SUPPLY OF GOODS, SERVICES OR BOTH:
Section 15(1) provides that value of supply of goods or services or both shall be-
From the plain reading of the above provision and the definitions,we understand that the amount in money paid/payable for the supply of goods or services or both is called the transaction value, and shall be the value of such supply on which tax is payable , provided supplier and the recipient are not related persons and money paid/payable is the sole consideration i.e. both the conditions should be satisfied. In case, supplier and the recipient are related persons as defined above or the amount paid/payable is not in money only but partly in money and partly in non-money or wholly in non-money, then this sub-section will not apply and consideration paid/payable will not be taken as transaction value and therefore cannot be said to be the value of such supply.In such a case,Section 15(4) will apply which provides that where the value of supply cannot be determined as per sec 15(1), the same will be determined by the manner prescribed.Rule 27 and 28 lay down the procedure and will be helpful in such circumstances.
Further, please also note that the price (money) can be paid by the recipient or any other person on his behalf as per the definition of consideration in section 2(31). In addition, the consideration in money should be for such supply only and not for any other purpose such as payment as refundable security deposit etc. to the supplier.
ILLUSTRATION -1: Customer A selects a shirt for a price of Rs.3000/- of a particular brand from a shop and pays in cash. Another customer B is a good bargain master and settles for similar shirt at Rs.2700/-.Third customer C comes in who is a better bar gainer settles the price at Rs.2500/-.
All the three customers are not related persons with the supplier and consideration is paid in money, therefore, money paid Rs.8200/- by all three is the total transaction value on which tax is payable as per section 15(1) .
ILLUSTRATION-2: Now consider that customer D(an employee of the supplier) comes in and settles the price at Rs.2200/- for the similar shirt then what will be the value of this shirt for the levy of GST?Whether Rs.2200/-or as valued by any other method?
Since D is an employee of the supplier and is covered in the definition of related person, Rs.2200/- can – not be said to be the transaction value and Sec 15(1) cannot be applied. Rule 28 will be applicable in this case to determine the taxable value.
4. ITEMS TO BE INCLUDED IN VALUE: SECTION 15(2)
From the experience of the Excise, States Vat and Service Tax regime where litigation reached to Apex Court on many items whether to be included/ excluded in the transaction/taxable value or not, the Govt. has placed such items in section 15(2) of the CGST Act it self to remove any doubt. Accordingly Section 15(2) provides that following items must be included while determining the value of goods or services or both.
a) Any tax, duty, cess, fee and charges levied under any law for the timebeing in force other than GST law, if charged separately.
(Example-custom duty paid on imports will be added to calculate IGST payable thereon).
However, the value will not include TCS under Income Tax Act as TCS is not a tax on goods but a levy on income.Circular No.76/50/2018 GST dated 31.12.2018 and Corrigendum No. 20/16/04/2018 GST dated 7.3.2019.
b) If supplier is liable to pay any amount in relation to supply but has been paid by the recipient and not included in the amount paid or payable, the same will be included in the price.
(Example-A supplier in Delhi hired a commission agent in Mumbai to get orders from Mumbai area and agreed to pay him commission @5% on order value. On supply of such orders for Rs.1,00,000/- he was liable to pay commission of Rs.5000/-to the agent.He directed the customer in Mumbai to pay Rs.5000/- to the agent in Mumbai directly and balance to him. GST is payable on Rs.1,00,000/-and not on Rs.95000/- as the liability of the supplier Rs.5000/- paid by the recipient is also to be included in the value of supply u/s15(2)(b) ).
c) Incidental expenses(such as weighment charges, loading charges in the factory, inspection,testing before supply, development charges like design etc.), including commission, packing and any other amount charged by the supplier on supplies at the time of or before the delivery of goods or supply of services.
(Example-if the customer tells the supplier to supply the product in a special gift pack for which supplier charges separately, GST will be applicable on the price including packing charges).
d) Interest, late fee or penalty for delayed payment of any consideration for any supply.
Time of supply in case of interest late fee or penalty will be the tax period in which interest payment is actually received even if Debit Note has been raised earlier -refer section 12(6) in case of goods and section 13(6) in case of services and Rate of tax on interest etc. will be the rate applicable on the original supply. This means that tax is payable on interest etc. on receipt basis even if accounted for on accrual basis. Further interest, late fee and penalty should have been received in respect of a consideration for the original supply then only it can be included.Any charge received by any other name for delayed payment of consideration for a supply will also be covered here.
Penal interest on EMI late received will be included in the value of supply as clarified by Circular No.102/21/2019-GST dt. 28.06.2019
e) Subsidies received by the supplier if directly linked to the price excluding subsidy from Central or State Govt. are to be included. However, If subsidy is received by the recipient it cannot be included.
Example – A contractor supplying food to employees of a company charging Rs.100/-per plate from the employee but getting Rs.30/- from the company.This Rs.30/- will be added to the value of supply to determine GST payable.
5. EXCLUSIONS: TREATMENT OF DISCOUNTS-SECTION 15(3)
In order to promote turnover and to attract more and more customers, many promotional schemes are employed by trade and industry by way of allowing discounts. Such discounts are allowed, to be reduced to arrive at the transaction value under GST Law subject to certain conditions as explained below:
1) Discount before supply-If the discount is mentioned in the invoice by the supplier, before or at the time of supply, the same will be reduced to determine the value of supply. Normally, it is allowed as a result of negotiations at the time of supply itself. GST is charged after reducing the amount of discount agreed upon.
Example-The published price of a shirt is Rs.3000/-and supplier agrees to give discount of 10% as a result of negotiation with the customer, then Rs.300/- will be reduced to arrive at the transactional value and GST will be charged by the supplier in the bill at Rs.2700/-only.
Abnormal discount-However, if the amount of discount allowed is abnormal, the same may be questioned during audit assessment by tax authorities as no prudent business will give higher discount than his margin unless it is a distress sale or a clearance sale. Hence, in audit assessment, the same may be required to be explained to the satisfaction of the tax authorities or otherwise it will be considered as a flow of non-monetary consideration and valuation can be done as per Valuation Rules prescribed. The taxpayer needs to be cautious while discharging his tax liability in such a case.
2) Discount after supply-If discount is allowed after effecting the supply, such as turnover discount, cash discount etc. the same is allowed to be reduced from value of supply provided;
a) there was an agreement for such discount prior to or at the time of supply between the supplier and the recipient, and
b) if discount can be specifically linked to the invoices already issued for supplies, and
c) ITC relating to discount has been reversed by the recipient.
All three conditions should be satisfied. Such discounts are allowed by issuing credit notes by the supplier.
However, taxpayer should be cautious that agreement for discount should preferably be in writing to avoid future dispute with tax department during audit assessment.
Types of discounts: Popular and known discount schemes adopted by trade and industry are in the nature of Cash Discount, Turnover Discount, Special Discount, Discount in kind, Free stocks, Buy One Take Two, Nominal value supplies, Liquidated damages etc. However, treatment of these discounts are not being discussed in detail here in this article but reading of following clarifications by CBIC will be useful.
CBIC CLARIFICATIONS ON DISCOUNTS: Circular No. 92/11/2019-GST dated 07.03.2019 has been issued by CBIC GST Policy Wing explaining treatment of various discounts like Free Samples and Gifts,Buy One Get One Free offer,Buy More Save More, Secondary Discounts etc. and reversal of ITC by the recipient.
Another Circular No.105/24/2019-GST dated 28.06.2019 issued by CBIC on treatment of post-sale discounts by way of issue of Financial Credit Notes and other issues has been withdrawn vide Circular No.112/31/2019-GST dated 03.10.2019 due to some ambiguity.
6. VALUATION OF SUPPLY OF GOODS OR SERVICES WHERE THE CONSIDERATION IS NOT WHOLLY IN MONEY-RULE 27.
From the above discussion, we observed that section 15(1) can be applied to determine the value of supply only when whole consideration is in money only. If it is partly in money or wholly in non-money, then section 15(4) is applicable which provides that valuation will be done as prescribed.Rule 27 has been prescribed for this purpose and is discussed hereunder;
a) Open Market Value (OMV) of such supply: Open market value has been defined in the explanation to the rules – which is “full value in money excluding GST payable by a person in a transaction where supplier and recipient are not related and the price is the sole consideration and such supply is obtained at the same time when the supply being valued is made”.
Example-A new phone is supplied for Rs.20,000/-with exchange offer of an old phone. If at the same time, the price of the similar new phone is Rs.24,000/-for supply to an unrelated person, then transaction value of the supply in question will be Rs.24,000/-.and taxpayer has to pay GST on Rs.24,000/-.
Please note that Open Market Value of such supply is to be seen when supplied to an unrelated person and price should be in money only.Further, full valuein money of the supply will be considered.
b) Sum total of consideration in money and any such further amount, in money as is equivalent to the consideration not in money, if such amount is known at the time of supply.
If OMV mentioned in (a) above is not available, then we need to use this method to determine the value of supply. Here, firstly we need to establish that OMV is not available and then we need to find out the money value of the consideration which is not in money. This value is the amount which is known at the time of supply itself and is being explained with the following example.
Example:If a laptop is supplied for Rs.40,000/- along with exchange of a printer being manufactured bythe recipient and its value at the time of supply of laptop is Rs.4,000/- but OMV of laptop is not available for any reason, then the value of supply has to be determined by method (b) as (a) is not applicable. By this method, value of supply comes to Rs 44,000/-.
In this method, statement of the supplier that OMV of such supply is not available can be challenged by tax authorities in audit assessment as the same will depend upon facts and circumstances of each case. Further, at some point of time, it may even be difficult to ascertain the value of non-monetary consideration. In such a situation, this method cannot be used.
c) If value of supply is not determinable under clause (a) or (b) above, it will be the value of supply of goods or services or both of like kind and quality.
This method can be used only when methods mentioned above in (a) or (b) cannot be applied. Therefore, firstly taxpayer has to establish that OMV is not available and amount of consideration, not in money, is also not available based on facts and circumstances of the case. In this method, we need to know the value of supply of like kind and quality which has been defined in the explanation of Rules 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 same 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.
In this method, we need to compare our supply with other supply made under similar circumstances and is same or closely or substantially resembles. Therefore, this method cannot be used if some big difference is there in comparative supplies. Further, it is very difficult to compare the quality of services rendered by different professionals.
d) If the value is not determinable under clause (a) or (b) or (c) above, be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or 31 in that order.
7. Rule 30 –The value shall be 110% of cost of production or manufacture or cost of acquisition or cost of provision of services. For determination of Cost, Cost Accounting Standards-4 may be used.
8. Rule 31 –Residual method for determination of value of supply of Goods or Services or Both-when value can not be determined by any method prescribed in Rule 27 to 30 it will be determined by using reasonable means which are consistent with principles and general provisions of section 15.
9. RULE 28 – VALUE OF SUPPLY BETWEEN DISTINCT OR RELATED PERSONS OTHER THAN THROUGH AN AGENT – Shall be
a) The open market value,
b) If OMV 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 31, in that order.
(Note: All the above three points are similar to Rule 27 discussed above and discussion over there is applicable here also.)
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to the 90%of the price charged for the supply of like kind and quality, by the recipient to his customer not being a related person.
(The use of this proviso is at the option of the taxpayer)
Provided, further, that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the OMV of the goods or services.
Since the recipient is a related person and entitled to full credit, therefore, any value shown in the invoice shall be accepted by the department in view of the above proviso as there is no loss to revenue. However, taxpayer needs to be cautious while issuing invoices below cost for stock transfers between branches and also cross charge invoices for supervisory services provided by HO to its branches on which ITC is not available .The same may be examined during audit assessment by tax officers and in case of wrong declaration of value additional tax, interest and penalty may be determined which will be a cost to the tax payer.
(Proviso II is independent of Proviso I-as per Appellate Authority for advance ruling in the matter of Specs makers Opticians Pvt Ltd. 2020(32) G.S.T.L 751
GST Law has addressed shortcomings in the valuation provisions of Custom Act, Excise Act, Service Tax Act and States Vat Act so as to minimise the litigation which reached to various courts during erstwhile regime, by including and excluding certain expenses to determine the value of supply as mentioned in section 15(2) and 15(3) of CGST Act, 2017.Based on the experience of erstwhile laws,concept of Transaction Value has been adopted under GST Law considering judgement of Hon’ble supreme Court that tax authorities can- not compel the businessman to sell the goods at a particular price to maximise his profit. Further, wherever the transactions are between related parties, there is a likelihood of price being influenced to reduce the tax liability and, therefore, valuation rules have been provided so as to arrive at transaction value by making necessary adjustments.Head office and branches need to be very careful while invoicing for cross charges and branch transfer of goods at proper value. Taxpayers need to correctly determine the value of supplies as per section 15 of CGST ACT, 2017 and RULES prescribed thereunder, and pay the due tax to save additional tax liability with interest and penalty for any enhancement in value by the Tax Authorities during audit assessment three-four years later. Interest rates in GST Law are quite high and as recipient may not be able to get credit of ITC on additional tax, entire burden has to be borne by the supplier only, as a cost to him, which sometime may be more than his profit.
Disclaimer: The views expressed in this article are personal views of the author and the article is for educational purpose only. He does not take any responsibility for any loss or damage caused to any reader by using the views expressed in this article.