Are You Paying GST or Income Tax on Exchange of Assets?

Sometimes we exchange assets such as immovable property and ignore the taxation aspect thinking that as there is no money transaction, no tax is applicable.  Let us understand the correct tax implications in such cases. What is the meaning of exchange?  In exchange, the transfer of property takes place for a consideration other than money, two persons mutually transfer the ownership of their properties from one to other.

Immovable  properties:- In the case of exchange of immovable properties between two persons  ‘A’  and ‘B’, when property is transferred by A to B as well as another property is transferred by B to A apparent consideration for A  is value of property of B and similarly for B it is the value of property of A.

Invocation of Section 50D:- Section 50 D provides that where the consideration received as a result of transfer of  a capital asset is not ascertainable then for the  purpose of computing capital gains the Fair Market Value of the said assets on the date of transfer will be the Full Value of Consideration received  as a result of transfer. However, for invoking section 50D a finding by the AO to the effect that consideration received as a result of transfer of capital assets is not ascertainable is necessary and is a precondition. Thus, FVC for computing capital gains on exchange of immovable properties would be the FMV of the properties transferred.

Asset Exchange

Involvement of Section 56(2)(x);- In case of transfer by way of exchange, if the FMV  of property received is more than the FMV of property transferred by Rs 50,000 then addition can be made u/s 56(2)(x). Let us understood this concept with the help of an example. A transfers his land to B whose FMV is Rs 10 lakhs and in exchange he gets building whose FMV is Rs 15 lakhs. Now capital gains in the hands of A will be calculated by taking  FVC  of at Rs 10 lakhs  in accordance with section50D. In addition to that as the FMV of property received of A exceeds the FMV of property transferred by Rs 5 lakhs addition u/s 56(2)(x) shall be made to that extent.

Taxability and Valuation under GST;-  At the outset it can be stated that exchange of assets is specifically included in the definition of supply which states “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, lease or disposal made or agreed to be made for a consideration by a  person  in the course of or furtherance of business.

Now the question is that how the valuation of exchange transactions is to be done. For  this Rule 27 of CGST Rules ,2017 comes to the rescue which states as under;-

1 Value of Supply shall be Open Market Value (OMV) of such supply. However, it is necessary that supplier is not related to recipient and price is the sole consideration.

2 If the OMV is not available the value shall be sum of total of monetary consideration and money equivalent or non-monetary consideration. For example, a refrigerator is supplied for Rs 20000 along with an offer of exchange of an old refrigeration valued at Rs 4000.In such a case value of supply of refrigeration is Rs 24000.

3 If the value of supply is not determinable under clause (i) or (ii) the value of supply shall be the value of supply of goods or services or both of like kind and quality ,which means any  other supply of goods or services made under similar circumstances.

4 If the value cannot be determined on the basis of any of the methods mentioned above, then as per Rule 30 value shall be 110% of the cost of production or acquisition or cost of provision of such services.

If Rule 30 cannot be applied then Rule 31 is to be applied which prescribes residual method i.e. value is to be determined using reasonable means.

Availability of Input Tax Credit;-

ITC of the GST paid shall be allowed to both the parties. However, if the supplier is a composition dealer then ITC is denied to recipient.

CONCLUSION

To summarize it must be borne in mind that in exchange of assets there are implications under direct as well indirect taxes. For direct taxation, one has to follow the principles laid down in section 50C and Section56(2)(x) as given above. Also, care should be taken in calculating indirect taxes in case of exchange of assets or services.

The author is a practicing Chartered Accountant and can be contacted at sandeep@kcccas.com. Any comments or queries are welcome.

DISCLAIMER

The information provided in this article is for general informational purposes only. All efforts have been made to provide accurate information in this document, however it should not be perceived as a professional or legal advice. Reader should consult a professional before making any decision based upon this document. Under no circumstance author or the publisher shall have any liability to you for any loss or damage of any kind incurred as a result of the use of this information.