Till now, the transaction with related persons has been a special area of consideration for government and tax authorities on the assumption that the transaction may be motivated by something more than earning the profit. To avoid the tax evasion in such transaction, various safeguards are adopted in tax laws, such as transfer pricing provision, section 40(A)(2), etc. introduced in Income Tax Act.
Similarly, GST has introduced certain provisions that will affect the related party transaction of the business owner.
According to CGST Act, if the person has obtained separate registration for establishments, such establishments will be treated as ‘distinct persons’. It is to be noted that the different registrations may be obtained for establishments under GST whether they are in same state or different states.
Further, according to IGST Act, establishment in India and outside India will be treated as ‘distinct persons’.
As per CGST Act, definition of ‘related persons’ covers officer, directors of business, business partners, employer-employee, ownership interest >25%, controlling interest, common control and family members. The deeming provisions also include exclusive agent, distributor or concessionaire (holder of a concession or grant, especially for the use of land or commercial premises or for trading rights) in the definition of related persons.
Impact of transaction with related persons / distinct persons
The GST Act stipulates that the supply without consideration to related persons / distinct persons will still be treated as supply chargeable to GST. Thus there is no requirement of consideration for charging GST on such transactions. Therefore, even the simple transfer of stock between separate branches of same person will be chargeable to GST.
However, the next question arises is that what will be the value on which GST % will be charged. For this, the government has notified valuation rules. As per the valuation rules, irrespective of the value of transaction (whether with transaction or without consideration), value for charging GST will be as follows:
However, if the buyer is eligible for full input tax credit, then the value of invoice will be taken as value of transaction without any dispute. This is because such transaction will be revenue neutral for tax authorities. For example, if the related persons deflate the value of transaction to pay less amount of GST, the buyer will get less input tax credit to reduce from GST payable by him.
It can be seen from above options provided to adopt the valuation that business owner will have to perform logical analysis and maintain robust documentation to prove that the related party transactions are not distorted.
Open market value of goods can be found out using the value of goods sold by the seller to unrelated parties. This is similar to internal CUP method in transfer pricing provisions of income tax. However, in the services industry it is often difficult to compare the value of services since it depends on number of factors.
Furthermore, the value of goods and services of ‘like kind and quality’ aims at finding out the value based on broad comparables where the exact comparables are not available. This may also require the necessary adjustments to the value of comparable transaction to make it more relevant in determining the value of related party transaction.
The cost of production of goods may be available to trader and manufacturer if appropriate records are maintained. However, it may be difficult for service provider to determine the exact cost of service provided to related persons. In such a case, service provider may accumulate costs in appropriate cost centers and allocate such costs by applying appropriate allocation keys.
Where it is not possible to determine the value by above means, ‘reasonable means consistent with the general principles and provisions’ can be adopted. Though, these words imply subjective concept, the methods prescribed under transfer pricing provisions of income tax may be adopted to determine that the transaction is at arm’s length price. For example, the ‘open market value’ of goods can be determined using CUP method. It is probable that using scientific methods prescribed by another legislature (Income Tax Act) and supported by robust documentation will strengthen the grounds in case of litigation.
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Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.