Supply & Value of Supply
The event which attracts the levy of ‘tax’ is called the taxable event and in GST, the taxable event is ‘Supply.’ The scope of this Supply has been defined under section 7 of the CGST Act. s.15 determines the ‘Value of taxable supply’ of goods or services or both, to be the ‘transaction value’ which is the price paid or payable for the said supply of goods or services or both, where the (i) supplier or the recipient of supply are not related and the (ii) price is the sole consideration for the supply.
Valuation of Supply under GST
Determination of ‘Value of Supply’ is important as the GST payable is calculated on the same. Generally .As per s.15 (2), the value of the supply shall include:
(Compulsory inclusions)
– Any taxes[1] duties, cesses, fees, surcharges levied under any law for the time being in force other than this Act, the SGST Act, the UTGST Act and the GST Act if charged separately by the supplier.
– Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of such supply but not included in the price actually paid or payable for the goods and services or both.
– Incidental expenses including commission and packing charged by the supplier to the recipient of the 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.
– Interest of late fee or penalty for delayed payment of consideration for any supply.
– The subsidies directly linked to the price exclusion the subsidies provided by the central govt and the state govt.
Exclusion from Valuation
The Act excludes from valuation by virtue of s.15(3), any ‘discount’ which is given ‘before’ or ‘at the time of supply’, if such discount is duly recorded in the invoice issued in respect of such supply. If any discount given ‘after’ the supply is effected, if any such discount is established in-terms of an agreement entered into at or before the time of such time of supply and specifically linked to the relevant invoices and also input Tax Credit as is attributable to the discount on the basis of such doc issued by the supplier has been reversed by the recipient of the supply.
Section 15 clearly indicates that, if the value of goods or services or both cannot be determined under sub section (1) the same shall be determined in the manner as may be prescribed. For the same, valuation has to be resorted to on the basis of CGST rules starting from Rule 27 to Rule 33. The appropriate mechanism are given under the respective rules for the respective situations.
CGST vs LEGACY LAWS
Explanation to s.15 defines who would constitute ‘related persons’ under the CGST Act.. In principle the CGST act has adopted more or less the ingredients of transaction value as it was under the erstwhile Central Excise Act 1944/Customs Act 1962. The only conspicuous modification that has been effected under the said s.15 of the CGST Act in respect of Transaction value is that under the earlier CE Act, there was no specific exclusion of discounts from the value. The same was excluded only by virtue of Govt clarification and SC decision in Union Of India v. Bombay Tyre International Ltd[2]. The principle effected on discounts in the CGST act is based upon the SC decision in the above case where it clearly indicated that discounts can be deducted from the value, if the nature and allowance of discount are known before or at the time of supply of goods.There is no necessity for indicating the discounts in the invoice raised at the time of supply and even post supply discounts can be given in the form of credit notes provided they were established on the basis of agreements/purchase orders, contracts and even by established practise. There cannot be difficulty in claiming the deduction in value in case of discounts reflected in the invoice itself, but however disputes may arise as to whether discounts granted after supplies are effected can be permitted to be deducted even in case where there are no written agreements.
However, the Hon’ble Supreme Court under erstwhile Central Excise Act permitted discounts for abatement even when they are granted by established practice.
The CGST Act invariably uses the expression, ‘an agreement’ in regard to supply of goods or services -even in s. 7 of the CGST Act, while referring to the scope of supply, the section uses the expression, all forms of Supply of goods or services…..supply/disposal made or agreed to be made. As per the Indian Contract Act, an ‘agreement’ can be in oral if it fulfils the essentials under s.10 of the Act[3]. Thus an agreement can be both in oral or in writing.
The SC decision in Bombay tyre industries case referred to earlier also accepts if discounts are granted as established practise, the same can be permitted to be deducted from the value, which means there is no requirement for the agreement to be in writing. From the reasons stated above in brief, there is scope for meeting the objection that if the supplier of goods and services is able to prove that by established practice that certain customers are being granted the discounts which are granted post supply, same should be permitted to be deducted from the transaction value even in absence of an agreement in writing. We have to await department’s objection, if any, on this issue.
It may also be seen from sec 15 (1)(c) that the Act contemplates, inclusion of expenses incurred or expenses charged only in respect of anything done by the supplier at the time of supply or before delivery of goods or supply of services, which means, that beyond the delivery point, any expenses incurred which are not relatable to the delivery or supply may not be includible. This would mean that in case of ex-factory sales, the transport cost incurred by the recipient on his own account cannot form part of the transaction value. However, where under a contract or agreement or purchase order, delivery has to be done only at the buyer’s premises where only sale is complete, such transport cost is to form part of value.
Valuation Rules
Where the ‘transaction value’ cannot be determined by applying s.15, the Determination of Value of Supply, CGST Rules, 2017 s from 27 to 33 will apply in their respective situations.The important provisions under the valuation rules, which may have day to day application are –
(i) Rule 27 relating to value of Supply when consideration is not wholly in money.
(ii) Rule 28 relating to value of supply of goods or services between distinct/related persons.
(iii) Rule 29 relating to value of supply of goods made or received through an agent.
(iv) Rule 30 relating to value of supply of goods or services or both based on cost.
(v) Rule 31 prescribes a residual method for of value of supply of goods or services or both.
(vi) Rule 31A relates to value of supply in case of lottery, betting, gambling and horse racing
(vii) Rule 32 relates determination of value in respect of certain suppliese.g currency, second hand goods, booking of tickets, life insurance, stamps etc.
(viii) Rule 33 relating to value of supply of services in case of pure agents.
Rule 27
Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall be determined using the open market value of such Supply. ‘Open Market value’ means the full value in money, excluding GST payable where the supplier and the recipient of the supply are not related the price is the sole consideration, to obtain such supply. If the open market value is not available, the sum 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 not determinable, then the value of supply of goods / services or both of like kind.
Rule 28
In Rule 28, there is an improvement over the erstwhile valuation rules under the excise by simplifying the provisions and reducing the scope for litigation by clearly providing two provisos under the said rule.
(i) The first proviso envisages that in respect of goods which are intended for further supply as such by the recipient the value can be an amount equivalent to 90% 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.
(ii) The second proviso to the said rule further simplifies that in the event the recipient is eligible for full input tax credit the value declared in the invoice shall be deemed to be the open market value of the goods or services.
Rule 29
S. 2(5) of the CGST Act defines Agent, which 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 carriers on the business of supply or receipt of goods or services or both on behalf of another. Agency relationship is very common in business and in eyes of common law, the Principal and agent are one and the same. However, the GST act differentiates them and makes the ‘service’ taxable. The Value of supply of goods between the principal and his agent shall (i) be the open market value of the goods being supplied, or (ii) be 90% 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.If he value of a supply is not determinable, the same shall be determined by application of rule 30 or rule 31 in that order.
Rule 30
If value of a supply of goods or services or both is not determinable by any of the preceding rules i.e 27-29, 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.
Rule 31
Rule 31 is a residual entry which states, if the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same should be determined using ‘reasonable means’ consistent with the principles and the general provisions of section 15 and the provisions of Determination of Value of Supply Rules. It further states that in the cases of supply of services, the supplier may opt for this rule, ignoring rule 30.
Rule 31A
The value of supply of lottery run/authorized by State Governments shall be the face value or the price notified in the Gazette, whichever is higher. The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club is 100% of the face value of the bet or the amount paid into the totalizator.
Rule 32
Value in respect of certain supplies at the option of the Supplier
(i)Purchase or sale of foreign currency, including money changing shall be determined
(a) 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, as the case may be, and the Reserve Bank of India reference rate for that currency at that time, multiplied by the total units of currency.
(b) 1% 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; Rs. 1000 + .5% of the gross amount of currency exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees & Rs. 5005 + 1/10% of the gross amount of currency exchanged for an amount exceeding ten lakh rupees, subject to a maximum amount of sixty thousand rupees.
(ii)Booking of tickets for travel by air provided by an air travel agent shall be determined at an amount calculated at the rate of 5% of the basic fare in the case of domestic bookings, and at the rate of 10% of the basic fare in the case of international bookings of passage for travel by air.
(iii) Taxable Supply by persons dealing in buying and selling of second hand goods 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 provided 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 the purchase of such goods.
(iv) Token, voucher, coupon, stamp shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.
Rule 33.
Rule 33, is more or less a replica of Rule 5 in the erstwhile service tax valuation. As per this rule ‘Pure Agent’ means someone who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (at actual, without adding any profits and not adding it to the value of his own supply) for such supplies from the recipient of the main supply. The improvement that appears to have been made in GST Rule 33 is that it indirectly gives a hint as to which type of expenses would be excludable from the value of supply of services in case of pure agent, the earlier ST Rule on the identical situation did not give any illustrations at all which led to lot of disputes as to which expenses would constitute reimbursable expenses for the purpose of exclusion. Under Rule 33 of the CGST Rule, on scrutiny of the illustration given therein, it appears that only such expenses which are compulsorily levied under any Act or rule which are incurred by the supplier on behalf of the recipient could be excluded from the value of supply of services as a pure agent.
Conclusion
The taxable event is the key of most tax legislations and the same determines the trigger of liability to pay tax. The value of tax to be paid is determined in accordance to the considerations involved in the taxable event, which in GST being ‘Supply’ and ‘Valuation of supply’ usually paid on an ad-valorem basis. However, an analysis of the above provisions raises the question as to whether disputes may arise on the scope of ‘consideration’ and whether in a particular transaction even if there is no ‘consideration’ a tax liability would arise.
In my view, Schedule I to the CGST Act has to be kept in mind where statute clearly specifies certain transactions as ‘supply’ even when no consideration is involved. Except those cases, no other case can be held to be liable to tax when ‘consideration’ is not involved directly or indirectly.
[1]The Value does not include Tax Collected at Source under Income Tax Act, as TCS is not a tax on goods but an interim levy on income. Refer CBI&C circular No. 76/50/2018-GST dated 31-12-2018 as amended vide corrigendum No. 20/16/04/2018-GST dated 7-3-2019.
[2]Union Of India v. Bombay Tyre International Ltd, 1984 SCR (1) 347.
[3] Alka Bose v. Parmatma Devi &Ors [CIVIL APPEAL NO(s). 6197 OF 2000]; Sheela Gehlot s. SonuKochar& Ors 2006(92) DRJ 498.
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