Valuation of supply under CGST Act, 2017 and Rules thereof– A Simplified Analysis

Value for supply of goods and services is important part of GST since the valuation will determine the corpus of tax leviable on each GST transaction.  

Value means price of any goods or service on which tax to be imposed particularly when parties are related or distinct person. Section 15 of the CGST Act, 2017 speaks on valuation and that is my focus for this article.

Primary basis of valuation is Transaction value which has not been defined in the Act but includes having price, between person not related and the price being sole consideration.

Value of Taxable Supply

1. The value of supply of goods or supply of services shall be transaction value that is price actually paid or payable where the supplier and recipient of supply is not related[1] party and price is the sole consideration for supply[2].

Author’s Note that it means where the person fall under definition of related person the valuation of both goods and services shall not be normally on transaction value but on Open Market Value (Discussed Later). For Example:- Domestic Company X Buys IT Consultation services from Foreign Holding Company Y. In such a case the OMV (Open Market Value of the service must be Identified and then subjected to Reverse Charge Mechanism) It will undoubtedly a difficult and subjective matter to identify OMV of Services specially.

2. Transaction value mentioned above shall include the following[3];

• Any amount incurred by the recipient of supply with respect to such supply and which was paid and payable by the supplier which has not been included in transaction value

(So Freight, Loading, Unloading, Packing charges etc shall be part of Taxable Value and chargeable to GST even if claimed as additional reimbursement on Invoice)

• Any taxes, duties, fees and charges levied under any statute other than tax under this Act. Like CGST, SGST, UGST etc.
• Incidental expenses such as commission or packing charged by supplier to recipient of goods or services or both including any amount charged by supplier for the supply of goods or services at the time or before delivery of goods or supply of services.
• Subsidy directly linked to the price excluding subsidy provided by the Central or State Government[4]
• Interest or late fees or penalty for delayed payment of consideration for any supply.

3. Following shall not be included;

a] Transaction value shall not include any discount allowed before or at the time of supply provided such discount is recorded in the invoice.

Hence where the discount is not recorded and reflected on invoice, no deduction can be claimed on taxable value except in one instance which is as under.

b] Discounts Allowable after Supply if;

i]    discounts is given  as per the agreement entered into at or  before the supply and linked to relevant invoices.

Ii]   Input tax credit is reversed by the recipient of supply on such discount.

4. Where the value can not be determined as per sub section 1, the same shall be determined as may be prescribed.

Valuation Rules

1. Value of supply of goods or service where the consideration is not wholly in money

Value Shall be

• Open market value

For Example:- Where a new phone is supplied for ₹ 20000 along with the exchange of an old phone and if the price of the new phone without exchange is ₹ 24000, the open market value of the new phone is ₹ 24000.

• If OMV is not available, Total consideration in money plus Monetary equivalent of Non Monetary Consideration.

(For Example:- Where a laptop is supplied for ₹ 40000 along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is ₹ 4000 but the open market value of the laptop is not known, the value of the supply of laptop is ₹ 44000)

• If either of above two are not available, value of supply of goods or service or both of like kind and quality.
• If Above not also identifiable then Non Monetary Component to be valued as per Rule 4 or 5 as under.

Example

2. Value of goods or service or both between distinct or related person.          

Value shall be

• Open market value
• If OMV is not available, value of supply of goods or service or both of like kind and quality
• If above two are not available, value as determine by application of Rule 4 and 5 in that order.

Where the goods are for further supply by recipient (i.e Recipient himself is not the end point in the supply chain) then the value shall be at option of the supplier. Taxable amount shall be 90% of the price charged by recipient to his independent unrelated customer.

Where recipient is taking ITC, the value charged in the invoice of goods or service shall deemed to be open market value.

3. Value of supply of goods made or received through agent.

Value of supply of goods between principal and his agent shall

• OMV of goods supplied or at the option of supplier or at the option of supplier an amount shall be 90% of the price charged of like kind and quality by recipient to customer not being related person where recipient is not the end point in the supply chain.

For Example:- Where a principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of ₹ 5000 per quintal on the day of supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of ₹ 4550 per quintal (since it is OMV here).

The value of the supply made by the principal shall be ₹ 4550 per quintal or where he exercises the option the value shall be 90% of the ₹ 5000 i.e. is ₹ 4500 per quintal.

• Where the value is not fixed as above, it will be fixed as per rule 4 or 5 .

4. Value of supply of goods or service or both at cost

Where the value goods or services or both cannot be determined as per the proceeding rules, the value shall be 110% of the cost of production or manufacture or cost of acquisition or cost of provision.

5. Residual method for valuation of goods or services or both

Where the value goods or services or both cannot be determined as per the Rules 1 to 4, same can be fix by reasonable means consistent with principles and general provision of section 15 and these rules. In case of supply of services, the supplier may opt for this rule over and above rule 4.

(The Residual Method Scope must be limited to avoid Tax Terrorism specially in case of service sector where the intangibility and incomparability are biggest valuation bottlenecks)

6. Determination of value in respect of certain supplies

1. Value of supply in relation to purchase and sale of foreign currency. At the option of supplier may be any hereinafter;

a]    The value of supply of service in purchase or sale of foreign currency including money changing shall be determined by supplier of service as follows:

• When currency used is INR, difference of buying and selling and RBI rate for currency at that time.
• If RBI rate are not available, 1% of the gross amount provided or received.
• If money exchange is not having INR, the value shall be 1% of the lesser of the two amount received after conversion into INR at RBI rate.

Method once adopted will not be changed in rest of Financial year.

b]    The value of supply of service in purchase or sale of foreign currency including money changing shall be deemed to be

• 1% of the gross amount of currency exchanged subject to minimum of ₹ 250 up to ₹ 1 lac.
• Rs.1000 plus 0.50% of the gross amount of currency exchanged for an amount exceeding ₹ 1 lac up to ₹ 10 lacs.
• ₹ 5500 plus 0.10% of gross amount of currency exchanged for an amount exceeding ₹ 10 lacs subject to maximum amount of ₹ 60000.

2. Booking of ticket in travel by air.

5% of basic fare in domestic and 10% of basic fare in International

For the purposes of this sub-rule, the expression “basic fare” means that part of the air fare on which commission is normally paid to the air travel agent by the airline.

3.Life insurance business

• Gross amount charged from policy holder reduced by amount allocated for investment or saving on behalf of policy holder if such amount has been intimated to policy holder.
• In case of single premium annuity, 10% of single premium
• In case of other, 25% of premium charged in the first year and 12.5% of premium in subsequent year.

Provide that this rule will not apply where premium paid by  policy holder is towards coverage of risk cover in life insurance.

4. Where taxable supply is provided by person dealing in buying and selling of second hand goods and no ITC has been claimed, value in this case shall be the difference of buying and selling of goods.

Where the purchase value of goods repossessed from defaulting borrower, who is not registered, Value of goods shall be reduced by 5% per quarter or part of the quarter from the date of purchase to the date of sale by person taking the repossession.

5. Value of token or voucher or coupon or stamp which redeemable against supply of goods or services or both shall be equal to money value of goods or service redeemed against such token or coupon.

6.  Where supply of goods or services as per paragraph 2 of  Schedule-I between distinct person or related person  and ITC is available, shall be deemed to be nil.

7. Value of supply of service in case of pure agent (Reimbursements as Pure Agent still Kept out GST)

Expenses or cost incurred by supplier as recipient of supply shall be excluded from the value of supply if all the following conditions are satisfied.

• Supplier act as pure agent of recipient of supply , when he make payment to third party after authorization by recipient.
• The payment made by agent has been separately mentioned in he invoice issued by agent to recipient.
• Supply procured by pure agent from third party as pure agent of recipient are in addition to services supplies on his own a/c.

Explanation : pure agent here means

i]   enter in to agreement of recipient of supply to work as pure agent to incur expenditure or cost in the course of goods or services or both.

ii]  neither hold or intend to hold any title of goods or service or both so procured or supplied as pure agent of supply.

iii]  does not use his own interest

iv]   receive only actual amount incurred to procure such goods or service

For Example: – Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies. The fees charged by the Registrar of the companies registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

8. Rate of exchange of currency other than Indian rupees

The rate of exchange for determination of value of goods or service or both shall be the reference rate of RBI on the date of time of supply in terms of  Section 12 & 13 of  Act.

1. Value of supply inclusive of integrated tax, central tax , State tax and Union territory tax

Tax Amount = value inclusive of tax* tax rate 100+ tax rate

Before Parting….

Two Key Points before I Sum up Closure:-

(a)  Valuation of services specially when intermitted between related persons and measuring OMV in such instance will be a difficult task for reasons above discussed. I feel industry should ensure proper OMV documentation in cases like Interconnected Undertaking transactions etc.

(b) What role can Transfer Pricing Play in GST is our special interest

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[1] (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;

(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.

[2] Section 15(1) of CGST, 2017

[3] Section 15(2) of CGST, 2017

[4] Explanation to 15(2)

Thanks for Reading … Awaiting Constructive Feed Backs !

(Author CA Ankit Gulgulia (Jain) is Practicing Chartered Accountant based in Pitampura, New Delhi. He is keenly interested in Indirect Taxation, Corporate Laws and Transfer Pricing besides being a writing enthusiast and a blogger. He can be reached at ankitgulgulia@gmail.com)