TRANSACTION VALUE OF GOODS & SERVICES UNDER GST (VALUATION RULE )
Section 15 of GST Act
To determine the value on which GST would be levied has been described in the Chapter IV of CGST ACT, 2017. The Provision says that there are five items such as taxes under other statutes, interest or late fee for the delayed payment of consideration, incidental expenses, subsidy etc, which should be included in the transaction value. There is one exclusion i.e. Discount which should be excluded from the Transaction Value. However there are certain transactions (such as barter, exchange, transaction with related parties, transaction between principal and agent) for which we have to refer to the valuation rule prescribed under GST Act. Different scenario under which we have to refer Valuation rule has been provided in the PPT enclosed.
Detailed provisions of Transaction Value u/s 15 of the CGST act are as under:
1. Valuation of Goods and/or Service [Section15(1)]
“Transaction Value” is the basis for Valuation for supply of goods and/or services under the GST Regime. For the levy of tax i.e. GST first we have to determine the transaction value. ‘Transaction Value’ is the price actually paid or payable for supply of goods and/or services.
This is subject to dual condition as mentioned below:
- Supplier and recipient of the supply are not related; and
- Price is the sole consideration for the supply
Transaction Value cannot be based on MRP
Under Section 4A of the Central Excise Act, the central Government has the power to notify the goods which shall be valued on the basis of MRP less Abatement permitted. However, GST Act there is no provision for determination of value on the MRP basis. Thus, in all cases liability of GST will be determined based on the transaction value.
Analysis of the term “Priceactually paid or payable for supply of goods and/or services”
Section 15(1) clearly speaks that transaction value shall be the price actually paid or payable for the supply of goods and services .It shows that there should be some nexus between supply of goods/services and the amount received by the supplier of goods and services. The contract will indicate the amount payable by the recipient for the supply of goods and services.
An Audit firm based in Delhi undertake an audit assignment of his client based in Gurgaon. The Contract mentioned about the audit fees of Rs 100000 and arrangement of taxi by the Clint who is which may be worth Rs 5000.
Thus here the price payable by the Clint who is towards audit is Rs. 105000 (not only audit fees but also the expenditure incurred in connection with the taxi R.s 5000)
Take the example of custom house agent. In the course of clearance of the goods Mr X an CHA incurred an amount of Rs 50,000 as custom duty. Such type of expenses is paid by the agent, in order to avoid the delay in clearance, which are subsequently reimbursed by the importer. Such type of expenses can not be form part of transaction value as these are the reimbursement but such reimbursement is not for the service rendered. Therefore Rs 50000 will not form part of transaction value.
Inclusions in the Transaction Value [Section 15(2)]
The transaction value shall include the following:
|(a)||Taxes under other statute||Any taxes, duties, cesses, fees and charges levied under any statute other than GST Act/IGST Act, if charged separately by the supplier to the recipient.|
As per rent contract, tenant required to pay local tax directly to the local body or to owner of the premise. Such local tax may form part of consideration for the supply of renting service.
Levy of entertainment tax by local authority is not subsumed in the GST .Therefore right to levy is still available with local authority and consequently it appears that any entertainment tax charged by the local authority will form part of transaction value.
|(b)||Any amount for which supplier is liable to pay||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 and/or services.|
Mr X, purchaser, has placed an order to supply a product “Packed in Carton” to Mr Y (supplier). As per the contract Mr Y is required to deliver the goods in the premises of Mr X. Thereafter Mr Y hires a transporter for transportation of goods. The lorry receipt of which indicate that freight is payable by receiver of goods (Mr X). In this case Mr Y was required to make the payment to the transporter as it is the obligation of Mr Y to deliver the goods to the premises of Mr X. Here in lieu of Mr Y, payment is being made by Mr X .Therefore, such payment will form part of transaction value of product.
Thus, in a contract, the obligation undertaken by the supplier for making supply of goods needs to be determined. All the expenses in respect of such obligation must be incurred by the supplier. But here the supplier was under obligation for which receiver has made the payment therefore the payment in connection with the supply i.e. Transportation will form part of transaction value.
A Chartered Accountant conduct an audit at client premises out of the state and hotel payment is made by the client. Here the payment made to hotel by the client will be included in the transaction value.
|(c)||Incidental expenses||1. Incidental expenses, such as commission and packing ,charged by the supplier to the recipient of a supply, including |
2. Any amount charged for anything done by the supplier in respect of the supply of goods and /or services at the time of, or before delivery of the goods or, as the case may be, supply of the services;
|Example-7: Packing |
Mr X goes to haldiram outlet and buys dryfruit worth Rs. 2000 . Mr X ask for the special packing for which Rs 500 is charged for packing . Here the transaction value will be Rs 2500 .
The amount for special packing is separately payable by the recipient to the supplier. The cost of such packing will be included in the value of supply even if the cost of packing is separately paid by the recipient.
A company appoints an agent to procure order of goods from buyer. Agent procures an order @ Rs.100 rupees. Now Seller company ask the buyer to pay only to supplier @Rs. 98 only and pay Rs 2 directly to the agent. Here GST will be charged on full Rs.100 as the Rs. 2 is the commission for this transaction.
Example-9: Anything done Before sale
A company advertises for sale of installed plant and machinery to sale the same on “as is where basis is”. In this case cost of dismantling the plant will also be included in the transaction value as the dismantling activity has nexus before sale of goods.
|(d)||Interest or late fees||Interest/late fee/penalty for delay in payment of consideration for supply will form part of value.|
| Example-10: |
Mr. X has supplied goods to Mr. Y on credit of 30 days. The contract provides that interest will be charged at the rate of 18% for delay in making payment of supply. It is specifically provides that such interest will form part of consideration and GST will be payable.
Comments: This provision is likely to have litigation as in most of the cases supplier is unable to recover the interest although it is mentioned in the contract.
|(e)||Subsidies||Subsidies directly linked to the price. |
(Except subsidies provided by the central and state Governments).
Explanation: The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.
| Example-11: |
Subsidy Linked to the price
Suppose, C sells goods and gets price support from its Manufacturer. The subsidy so received will form part of transaction value.
Subsidy not Linked to the price
Tisco General Office Recreation Club v. State of Bihar (2002) 126 STC 547 (SC), appellant, a dealer, was running a canteen for employees of the company. The prices were below cost price. However, TISCO, without any statutory obligation, as a staff welfare measure, was making good the excess of expenditure over income. The subsidy was not relatable to any item of food. It was held that the lump sum subsidy made ex gratia cannot form part of sale price and not to be included in transaction value.
Subsidy provided by CG or SG(not linked to price)
Government gives subsidy on supply of cooking gas cylinder to poor families. Nowadays such subsidy is transferred to the bank account of poor family directly and the company making supply of cylinder sells the goods at a fixed price and not at the subsidised rate. The amount of subsidy is directly credited to the bank account and the same is not received by the said company. Therefore such subsidy will not be considered as part of transaction value because this is not linked to the price and also the same is provided by Government.
Subsidy provided by CG or SG (linked to the price)
Sale of urea by the manufacturer at the recommended price by the Government (i.e. at cheaper price) to make urea at a cheaper price.The supplier is paid the subsidy directly by the Government. Here the subsidy is not to be included in the transaction value. Though it is related to the price but the same is provided by the Government therefore subsidy will not be included in the transaction value.
3. Exclusions from the Transaction Value [Section 15(3)]
The value of the supply shall not include any discount that is given:
(a) Discount given before or at the time of the supply provided such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) Discount given after the supply has been effected but:
(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 invoice; and
(ii) Input tax credit has been reversed by the recipient of the supply as is attributable to the discount issued by the supplies.
The Discount which can be excluded from the transaction value can be summarised as below:
|Example-15:Discount shown in invoice |
In many cases company offers trade discount to dealers depending upon the volume of supply. Such discount is reflected on the face of invoice therefore transaction value will be the price after discount.
Say, for instance, price of a car is Rs. 5 Lacs and a discount of 5% is given being the year end sale. Here the transaction value will be Rs. 4.75 Lacs i.e. after discount which will not be included in transaction value.
Example-16:Discount not shown in invoice
Mr. A purchases an Air Conditioner from Mr. B for Rs. 20000 on credit on July 1, 2017. On August 1, 2017, Mr. A gives discount of Rs. 5000 to Mr. B and Mr. B makes payment of Rs. 15000. Here if the discount is not known before or at the time of supply, then transaction value will be Rs. 20000. But if discount is based on terms of contract or terms of payment then transaction value will be Rs 15000 only.
Section 15(4) provides that where the value of supply of goods or services cannot be determined under section 15(1), the same shall be determined in the manner as may be prescribed.
Section 15(5) states that, notwithstanding anything contained in section 15(1) or section 15(4), the value of such suppliers as may be notified by the central or a state government in this behalf on the recommendation of the GST council, shall be determined in such manner as may be prescribed.
4. Definition of important terms used in this chapter
|Related person |
As given in the explanation to the Section 15 of f GST Act, “persons shall be deemed to be “related persons’’ if only –
a) they are officers or directors of one another’s businesses;
b) they are legally recognized partners in business;
c) they are employer and employee;
d) 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;
e) one of them directly or indirectly controls the other;
f) both of them are directly or indirectly controlled by a third person;
g) together they directly or indirectly control a third person or they are members of the same family;
Explanation I– The term “person” also includes legal persons.
Explanation II – 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.
Thus, if transaction is with the related person then the supplier has to substantiate that the value of supply is not influenced because of relationship. How the value of supply of services will be substantiated will be very difficult and cumbersome task.
The value on which GST is to be charged primarily depends upon the consideration received for taxable supply of goods and / or services, which is defined under section 2(31) of the CGST/SGST Act, as under.
“Consideration” in relation to the supply of goods or services includes:
(a) Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a state Government.
(b) The monetary value of any act or forbearance, whether or not voluntary in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.
In simple words, Consideration may have following features:
(i) It can be monetary or non-monetary.
(ii) It can be given to/by third person.
(iii) It should be lawful.
(iv) Forbearance/abstinence can be consideration.
(v) Compromise or composition is consideration.
(vi) It should be certain.
2. Deposit can not be considered as Consideration
Deposit, whether refundable or not, given in respect of the supply of goods or services shall not be considered as payment made for the supplyunless the supplier applies the deposit as consideration for the supply.
3. Fines and penalty can not be considered as Consideration
The amount received as fines or penalty for violation of statutory provision will not be considered as consideration. This has been clarified in Para No. 2.3.1 to 2.3.3 of CBEC Education Guide.
4. Meaning of “price is the sole consideration for supply”
Section 15(1) further provides that price should be the sole consideration for supply. If any additional consideration, whether monetary or non-monetary terms is received, the value of such consideration shall be added to the consideration to arrive at the transaction value. Interpretative Notes provide that payment made directly or indirectly by the recipient to the supplier will constitute the price actually paid or payable.
Example-17: Indirect payment
Settlement by buyer whether in whole or in part of debt owned by the seller. This can be elaborated with an example. Mr. X makes a supply of Rs. 2 lakhs to Mr. Y and contract provide that Mr. Y will pay Rs. 50,000 to Mr. X and Rs. 1,50,000 to Mr. Z to settle debt of Mr. X. In this case the price of Rs. 50,000 is not the sole consideration for sale. The amount of Rs. 1,50,000 payable by Mr. Y to Mr. Z is also part of consideration for supply of goods. Therefore GST will be paid on entire amount of Rs. 2 lakhs not only on Rs. 50,000.
5. How invoice, Credit note will be issued in respect of Charges and Discount in the GST Regime – Explained with Example
M/S Carwala Ltd sells a car worth Rs 4,00,000 to “B Automobiles”.
- They incur packing charges of Rs 5,000 on the car
- They provide a discount of 1% on the price, as part of Diwali scheme
- M/S Carwala Ltd agrees to provide a further discount of 0.5% if “B Automobiles” makes payment by 31st of the month by NEFT . “B Automobiles” makes the payment by 31st of the month by NEFT .
The invoice issued to “B Automobiles”, under GST, will look like this:
*Assuming GST of 18% on car
In the invoice:
- Packing charge of Rs 5,000 is included in the transaction value.
Packing charges or any incidental expenses charged before or at the time of supply of goods or services must be included in the transaction value.
- Discount of 1% is deducted from the transaction value.
Discount given before or at the time of supply, and which is recorded in the invoice, can be deducted from the transaction value.
- Discount of 0.5% is not deducted in the invoice. As discount of 0.5% is given after the supply, it will not be shown in the invoice. However, since the discount was known at the time of supply, and can be linked to this specific invoice, the discount amount can be reduced from the transaction value.
- Here M/S Carwalawill issue a credit note to “B Automobiles” for Rs 2,360 (0.5% of Rs 4,00,000 = Rs 2,000+ GST@ 18% on Rs 2,000 = Rs 360), and the same must be linked to the relevant tax invoice. ITC should be revered by the recipient.
- Discount given after supply but agreed upon before or at the time of supply and can be specifically linked to relevant invoices, can be deducted from the transaction value.
Example-19: Discount given after supply not known at the time of supply
“M/S CarwalaLtd” sells a car to “B Automobiles” for Rs 4,00,000. As per the standing agreement, a credit period of 30 days is allowed for payment. However, due to a severe cash crunch, M/S Carwala Ltd. offers to “B Automobiles” to make the payment within 2 days on which he will give discount of 2%. “B Automobiles” makes the payment within 2 days. In this scenario, since the discount was not known at the time of supply, it cannot be claimed as a deduction from the transaction value. Meaning thereby, the GST will be charged on full Rs 4 Lacs.