Value of Taxable supply of goods and Services under GST

By | September 7, 2016

VALUE OF TAXABLE SUPPLY OF GOODS AND SERVICES UNDER GST

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Transaction value is basis for valuation

The value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply – clause 14(1) of GST Model Law, 2016.

The conditions for accepting transaction value is that –

(a) supplier and recipient should not be related

(b) price is sole consideration.

The ‘value of taxable supply’ shall include following.

 Expenditure incurred by recipient

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 is includible in value – clause 15(2)(a) of GST Model Law, 2016.

For example, if recipient supplies some inputs free of cost, its value should be includible.

Hence, it is advisable to sale such goods by recipient charging GST so that supplier can take input tax credit. In any case, even if supplied free, the recipient will be liable to pay GST.

Supplies made by recipient free of cost or at reduced cost

The value, apportioned as appropriate, of such goods and/or services as are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost for use in connection with the supply of goods and/or services being valued, to the extent that such value has not been included in the price actually paid or payable; is includible in value – clause 15(2)(b) of GST Model Law, 2016.

Patterns/dies/masters/moulds supplied/made by buyer – If patterns/dies/masters/moulds are supplied by recipient, proportionate cost of such patterns/dies etc. should be added to ‘value’.

 

Royalties and license fees

Royalties and licence fees related to the supply of goods and/or services being valued that the recipient of supply must pay, either directly or indirectly, as a condition of the said supply, to the extent that such royalties and fees are not included in the price actually paid or payable; are includible in value – clause 15(2)(c) of GST Model Law, 2016.

Taxes other than GST

Any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the IGST Act; are includible in value – clause 15(2)(d) of GST Model Law, 2016.

Thus, SGST and CGST will be payable on net value only.

Incidental expenses as expenses before supply

Incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply, including 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 are includible in value – clause 15(2)(e) of GST Model Law, 2016.

Subsidies linked to supply

Subsidies provided in any form or manner, linked to the supply are includible in value – clause 15(2)(f) of GST Model Law, 2016.

Subsidy not connected with specific sale not includible – It may be noted that a general subsidy which is not specifically connected to sale of any specific goods will not be includible.

In Tisco General Office Recreation Club v. State of Bihar (2002) 126 STC 547 (SC), appellant, a dealer, was running 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.

Reimbursable expenditure and costs

Any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services is includible in value- clause 15(2)(g) of GST Model Law, 2016.

However, reimbursable expenditure or cost in relation to supply of services is not includible in ‘value’ if conditions of payment as ‘pure agent’ are satisfied.

Further, reimbursable expenditure is includible only if it is in relation to supply of goods and services.

Discount or incentive given after supply

Any discount or incentive that may be allowed after the supply has been effected is includible in value – clause 15(2)(h) of GST Model Law, 2016.

However, if such post-supply discount is established as per the agreement and is known at or before the time of supply and specifically linked to relevant invoices shall not be included in the transaction value – proviso to clause 15(2)(h) of GST Model Law, 2016.

Further, the transaction value shall not include any discount allowed before or at the time of supply provided such discount is allowed in the course of normal trade practice and has been duly recorded in the invoice issued in respect of the supply – clause 15(3) of GST Model Law, 2016.

Thus, discount after supply is permissible as deduction only if it was known before or at the time of supply.

There is provision of issue of ‘credit note’, which in conflict with aforesaid provisions.

However, credit note cannot be issued by the said person if the incidence of tax and interest on such supply has been passed by him to any other person – clause 24(1) of GST Model Law, 2016.

 

Meaning of ‘consideration’

“Consideration” in relation to the supply of goods and/or services to any person, 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 and/or services, whether by the said person or by any other person;
(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 and/or services, whether by the said person or by any other person – clause 2(28) of GST Model Law, 2016.

Clause ‘b’ would cover service of ‘refraining from act or tolerating an act or situation’.

Deposit is not consideration – A deposit, whether refundable or not, given in respect of the supply of goods and/or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply – clause 2(28) of GST Model Law, 2016.

Determination of value when value not ascertainable

The value of the supply of goods and/or services in the following situations which cannot be valued under section 15(1) of GST Model Law, 2016, shall be determined as per rules.

(i) the consideration, whether paid or payable, is not money, wholly or partly
(ii) the supplier and the recipient of the supply are related
(iii) there is reason to doubt the truth or accuracy of the transaction value declared by the supplier
(iv) business transactions undertaken by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery
(v) such other supplies as may be notified by the Central or a State Government in this behalf on the recommendation of the GST Council.

GST Valuation RulesEmpowered Committee has released draft of GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016.

Rules to be applied sequentially – Arrangement of GST Valuation Rules is such that rules 3 to 6 are to be applied sequentially.

Mixed taxable and non-taxable supply

Where the supply consists of both taxable and non-taxable supply, the taxable supply shall be deemed to be for such part of the monetary consideration as is attributable thereto – rule 3(3) of GST Valuation Rules.

Supplies to related person

In case of supplies to related person, value shall be determined on basis of

(a) value of comparative goods and services

(b) Computed value

(c) Residual method of valuation rules, as applicable.

The transaction value shall be accepted even where the supplier and recipient of supply are related, if the relationship has not influenced the price – rule 3(4) of Valuation Rules.

Clause 2(82) of GST Model Law, 2016 defines related person as follows—

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 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
(h) 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.

Goods transferred to same person or agent or principal

Where goods are transferred from—

(a) one place of business to another place of the same business

(b) the principal to an agent or from an agent to the principal, whether or not situated in the same State, the value of such supply shall be the transaction value – rule 5 of GST Valuation Rules.

“Agent” means a person who carries on the business of supply or receipt of goods and/or services on behalf of another, whether disclosed or not and includes a factor, broker, commission agent, arhatia, del credere agent, intermediary or an auctioneer or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not – clause 2(5) of GST Model Law, 2016.

Determination of value of supply by comparison

Where the value of a supply cannot be determined on basis of transaction value, the value shall be determined on the basis of the transaction value of goods and/or services of like kind and quality supplied at or about the same time to other customers, adjusted in accordance with the provisions of rule 4(2) of GST Valuation Rules – rule 4(1) of GST Valuation Rules.

In determining the value of goods and/or services under rule 4(1) of GST Valuation Rules, the proper officer shall make such adjustments as appear to him reasonable, taking in to consideration the relevant factors, including following

(a) difference in the dates of supply
(b) difference in commercial levels and quantity levels
(c) difference in composition, quality and design between the goods and/or services being valued and the goods and/or services with which they are compared
(d) difference in freight and insurance charges depending on the place of supply

Goods of like kind and quality – “Goods of like kind and quality” means goods which are identical or similar in physical characteristics, quality and reputation as the goods being valued, and perform the same functions or are commercially interchangeable with the goods being valued and supplied by the same person or by a different person -rule 2(b) of GST Valuation Rules

Services of like kind and quality – “Services of like kind and quality” means services which are identical or similar in nature, quality and reputation as the services being valued and supplied by the same person or by a different person – rule 2(c) of GST Valuation Rules

Computed method to determine value of supply

As per rule 5 of GST Valuation Rules, if the value cannot be determined under rule 4, it shall be based on a computed value which shall include the following :

(a) the cost of production, manufacture or processing of the goods or, the cost of provision of the services
(b) charges, if any, for the design or brand;
(c) an amount towards profit and general expenses equal to that usually reflected in supply of goods and/or services of the same class or kind as the goods and/or services being valued which are made by other suppliers.

Thus, the valuation will be on basis of cost plus overheads plus profit.

Residual method of valuation

Where the value of the goods and/or services cannot be determined under the provisions of rule 5, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules – rule 6 of GST Valuation Rules.

Rejection of declared value by proper officer

Provisions have been made for rejection of value as declared by supplier of goods and services.

Proper officer can reject value if he has reasonable doubt – When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any goods and/or services, he may ask the supplier to furnish further information, including documents or other evidence and if, after receiving such further information, or in the absence of any response from such supplier, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, it shall be deemed that the transaction value of such goods and/or services cannot be determined under rule 3(1) – rule 7(1)(a) of GST Valuation Rules.

Reasons to doubt value – The reasons to doubt the truth or accuracy of the value of the supply declared by the supplier shall include, but not be limited to the following:

(i) the significantly higher value at which goods and/or services of like kind or quality supplied at or about the same time in comparable quantities in a comparable commercial transaction were assessed;
(ii) the significantly lower or higher value of the supply of goods and/or services compared to the market value of goods and/or services of like kind and quality at the time of supply; or
(iii) anymis-declaration of goods and/or services in parameters such as description, quality, quantity, year of manufacture or production.

Meaning of ‘market value’ – “Market value” shall mean the full amount which a recipient of a supply is required to pay in order to obtain the goods and/or services of like kind and quality at or about the same time and at the same commercial level where the recipient and the supplier are not related – clause 2(67) of GST Model Law, 2016.

Show cause notice and opportunity of hearing – The proper officer shall intimate the supplier in writing the grounds for doubting the truth or accuracy of the value declared in relation to the supply of goods and/or services by such supplier and provide a reasonable opportunity of being heard, before taking a final decision. If proper officer is not satisfied with the value declared, he shall proceed to determine the value in accordance with rule 4, 5 or 6 sequentially. He should record the recons for not accepting value.

Rule 10 only provides mechanism to determine value – Rule 10 by itself does not provide a method for determination of value. It provides a mechanism and procedure for rejection of declared value in cases where there is reasonable doubt that the declared value does not represent the transaction value – Explanation to rule 10(3) of GST Valuation Rules.

Payment to service receiver not includible if paid as pure agent

Any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services is includible in value- clause 15(2)(g) of GST Model Law, 2016.

However, reimbursable expenditure or cost in relation to supply of services is not includible in ‘value’ if conditions of payment as ‘pure agent’ are satisfied.

As per rule 8(1) of GST Valuation Rules, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied—

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods and/or services procured
(ii) the recipient of service receives and uses the goods and/or services so procured by the service provider in his capacity as pure agent of the recipient of service
(iii) the recipient of service is liable to make payment to the third party
(iv) the recipient of service authorises the service provider to make payment on his behalf
(v) the recipient of service knows that the goods and/or services for which payment has been made by the service provider shall be provided by the third party
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party and
(viii) the goods and/or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Meaning of ‘pure agent’ – As per Explanation to rule 8(1) of GST Valuation Rules, “Pure agent” means a person who-

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods and/or services so procured or provided as pure agent of the recipient of service;
(c) does not use such goods and/or services so procured; and
(d) receives only the actual amount incurred to procure such goods and/or services.

 

 Valuation in case of Money Changer

Rule 8(2) of GST Valuation Rules provided that the value of taxable service provided for the services in so far as it pertains to purchase or sale of foreign currency, including money changing, shall be determined by the service provider in the following manner –

For a currency, when exchanged from, or to, Indian Rupees (INR), 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 (RBI) reference rate for that currency at that time, multiplied by the total units of currency:

In case where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money:

In case where neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI.

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