Section 15 – Value of Supply under GST

Section 15- Value of Supply – (CGST Rules 27-35 )

Today I will discuss provisions of Section 15 – At what value GST is to be levied???

15(1)- The value of a supply of goods or services or both shall be the transaction value, which 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.

15 (2)-  The value of supply shall include–––

a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax

(Compensation to States) Act, if charged separately by the supplier;

(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any 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.

√ Analysis- This section applies to both goods and services.

√ Transaction value should be taken for the purpose of valuation under GST. “Transaction value” has been explained in the section as the price actually paid or payable for the supply of goods and/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.

√ In addition to the price, certain express checks to be carried out that can disqualify a price that is otherwise perfectly admissible-

• • Taxes levied under any other law(s)- this clause provides for exclusion of GST from the value and therefore all other taxes charged must be included in the value before quantifying GST. For example- In case of import of goods IGST is charged on value of goods including basic custom duty.
  • Any amounts paid by recipient that are obligation of supplier to pay– identify any costs where supplier is obligated to pay but recipient makes the payment for that. For example– Free on road contract where transportation charges paid by recipient and value to be paid to the supplier is reduced to that extent. In this case, the transportation charge which was reduced from the price payable will be added back to the taxable value. Another example can be taken is ‘buying commission’’ –obligation is always of recipient and does not included in value of supply but if selling commission then the obligation to pay the agent being that of the supplier is required to be included in the value of supply.
  • Incidental expenses charged by the supplier– this clause refer costs that the supplier incurs ‘at’ or ‘before’ supply are liable to be included in the value of supply so any costs incurred after completion of supply not includible in value of supply. example- cost of packing and transportation , home delivery charges when food delivered by a restaurant to customer home.
  • Interest, late fee or penalty for delayed payment– Mr. X enters into a contract for supply of goods worth ` 2,00,000 on 15th March 2018. As per the said contract, a payment of the said amount was required to be made within 2 months of the sale. If the complete payment is not made within this time period, a late penalty of` 10,000 will be chargeable. Let us assume that the payment is not made within the said period. In this situation, ` 10,000 will be includible in the taxable value.
  • Subsidy realized by supplier on the supply– this clause expressly provides for the limited exclusion of subsidy from value of supply, that is, subsidy given by the Government alone is excluded from value of supply.

15(3)- The value of the supply shall not include any discount which 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—

(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.

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.

Explanation.—For the purposes of this Act,––

(a) 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;

 (b) the term “person” also includes legal persons;

(c) 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.

Analysis– Discount is another area that needs special mention. The emphasis to tax treatment of discounts is visible in the repeated mention of discounts in section 15(3) where the value of supply will not include discount, provided:

♦ It is allowed before supply.

♦ It is allowed after supply, provided that it is established in agreement linked to specific supplies and corresponding credit is reversed by recipient.

Now let us discuss various types of discount-

• ‘In-bill’ discounts – Means allowed exactly at the point of supply so excluded from transaction value.
• Off-bill’ discounts – are those that are allowed after supply through a credit note. Credit notes in the context of GST have been discussed in detail under section 34 which may be referred to identify whether in all cases of ‘off-bill’ discount, is credit note allowed to be issued .Conditions specified in section 15(3) must be satisfied for off-bill discount to be reduced from transaction value. Conditions are very simple and explicit.
• Cash discounts – are those that are allowed to incentivize the customer for prompt payment. Merely because the policy of allowing cash discount is in existence before supply does not always make cash discounts eligible under section 15(3). It is not suggested that all cases of cash discounts are not available to be reduced from the transaction value. But the circumstances under which cash discounts have been allowed requires inquiry into the circumstances leading to this cash discount.
• Quantity discounts-are those that are aimed at reducing the price of each supply on the condition that a certain quantity of stocks need to be exhausted within a specified duration of time .but now question arises can it can reduced from transaction value as it is related to time and value and cannot be linked to original invoice/specific invoice.
• Special discounts– are those that are allowed by a supplier to incentivize aggressive marketing of inward supplies on special occasions or in special market conditions. In most of cases these are given for product promotion so outside the scope of section 15(3).
• Discounts ‘in-kind -are those that are allowed in the form of holiday packages, gold coin, motor vehicle and other objects of high perceived incentive value. To begin with, these articles are rarely stocks in which the parties are dealing with, so outside the scope of section 15(3).
• Free stocks– are those that are similar to discounts ‘in-kind’ except that the articles given away are the items of inventory date with by the parties. In such a case, the stocks given away are taxable outward supply in exchange of non-monetary consideration flowing from the manufacturers to the dealer entitled to such free stocks.

Clarification given by CBIC vide circular vide Circular No. 105/24/2019-GST dated 28.06.2019 related to treatment of post sale or secondary discounts under GST .

Valuation Rules are prescribed under Chapter IV of the Central Goods & Services Tax Rules, 2017 from Rule 27 to Rule 35. Some of important rules discussed by me-

27. Value of supply of goods or services where the consideration is not wholly in money-

• This rule comes into effect when the condition that price is the sole consideration gets violated.
• it applies even when the consideration is partly in money or wholly in non-monetary form.-
• The following transactions of supply under section 7 straightaway arrive at this rule—
  • Barter and exchange transactions
  • Transactions listed in Schedule I
  • Transactions listed in Schedule II but without consideration

The value of supply shall be-

i. Open Market Value- which is the full value in money payable by an unrelated person as its sole consideration at the same time as the supply under inquiry.

For example- For example, in an offer of buy 1 get 1 free of shirts by a shop, the value charged is  2,000. In that case, the free stock item may be subject to the same value as that of the chargeable stock item. So, the value for the purpose of charging GST will be considered as  Rs 4,000.

ii. if the open market value is not available under clause (a), be the 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;

For instance, an old antique art of work is sold against which consideration is partly in the form of money of ` 20,000 and partly in the form of a new furniture whose value known at the time of supply is ` 35,000. Then the value for the purpose of GST will be the monetary consideration combined with the equivalent money value of the new furniture i.e. ` 55,000.

iii. Value of supply of ‘like kind and quality’ – here again two aspects are involved – one, to establish that clause (a) and (b) are not determinable and two, to identify ‘likeness’ of kind and quality.

Taking an example where this mechanism can be applied, a customized air conditioning unit whose open market value is not available is installed at an office wherein the consideration is paid in the form of money of ` 40,000 and an old air conditioning unit whose price is not available at the time of supply. A similar air conditioning unit in terms of characteristics, quality, quantity, functional components, materials and reputation etc. has been installed by the company at another client’s premises for ` 60,000. Since, the value of goods of like kind and quality is available, the value of ` 60,000 will be taken under Rule 27.

iv. Value is not determinable under any of clause 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 rule 31 in that order.

28. Value of supply of goods or services or both between distinct or related persons other than through an agent- The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, 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:

For example, an entity has four branches in Delhi, Mumbai, Kolkata and Bangalore. There is a head office of that entity in Hyderabad. The HO in Hyderabad recruits certain key management personnel for its branches. Here, it will be considered as if the manpower recruitment services are provided by the HO to its branches. For the valuation purposes, one needs to go through the hierarchy provided in Rule 28.

29. Value of supply of goods made or received through an agent- 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 per cent. 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.

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.

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:

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