Introduction
Accurate valuation of supplies is a pivotal aspect of the GST framework. The GST amount is computed based on the total value of the supply, emphasizing the need to understand the inclusions and exclusions from the transaction value to determine the correct “Value of Supply.”
What constitutes the value of supply under GST?
Section 15 of the CGST Act, 2017, precisely defines the term “Value of Supply.” According to section 15(1):
“The value of a supply of goods or services or both shall be the transaction value, representing the price actually paid or payable for the said supply of goods or services or both when the supplier and the recipient are not related, and the price is the sole consideration for the supply.”
How to calculate the value of supply if the supplier and recipient are related?
If the supplier and recipient are related, the value of supply, as per Rule 28 of the CGST Rules, 2017, should be calculated as follows:
(a) Use the open market value of the supply, if available.
(b) If the open market value is not available, consider the value of the supply of goods or services of similar kind and quality.
© If the value is indeterminable under (a) or (b), apply either rule 30 (110% of the cost) or rule 31 (general provisions for unrelated persons).
In cases where the goods are meant for further supply by the recipient, the supplier can choose to set the value at ninety percent of the price charged for similar goods by the recipient to a non-related customer.
Additionally, if the recipient qualifies for full input tax credit, the value mentioned in the invoice is deemed the open market value of the goods or services.
What is the meaning of “related” for this purpose?
As explained in section 15 of the CGST Act, 2017:
(i) Persons are considered “related” if they are officers or directors of each other’s businesses.
(ii) Legally recognized business partners are deemed related.
(iii) An employer and an employee are considered related.
(iv) If a person owns, controls, or holds twenty-five percent or more of the outstanding voting stock or shares of both individuals, they are related.
(v) If one person directly or indirectly controls the other, they are related.
(vi) If a third person directly or indirectly controls both individuals, they are related.
(vii) Together, if they directly or indirectly control a third person, they are related.
(viii) If they are members of the same family, they are related.
Explanation © further states that individuals associated with each other’s business as sole agents, sole distributors, or sole concessionaires are also considered related.
How to determine the value of supply when the payment is not entirely in money?
As per Rule 27 of the CGST Act, 2017, when the consideration for the supply of goods or services is not wholly in money, the value of the supply should be calculated as follows:
(a) Use the open market value of the supply.
(b) If the open market value is not available, add the consideration in money to any additional amount in money equivalent to the non-monetary consideration, if known at the time of supply.
© If the value is still undeterminable, use the value of supply for goods or services of similar kind and quality.
(d) If none of the above methods work, total the consideration in money and any further amount in money equivalent to the non-monetary consideration, determined by applying Rule 30 or Rule 31 in that order.
What are the specific items to be included for calculating the value of supply?
As per section 15(2) of the CGST Act, 2017, the value of supply shall include:
(a) Any taxes, duties, cesses, fees, and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act, and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
(b) 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 or services or both;
© Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
(d) Interest or late fee or penalty for delayed payment of any consideration for any supply; and
(e) Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.
Explanation- For the purposes of this subsection, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.
What is the treatment of discounts for calculating the value of supply?
As per section 15(3) of the CGST Act, 2017, the value of the supply shall not include any discount which is given
(a) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) After the supply has been effected, if-
(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 invoices; and
(ii) Input tax credit as is attributable to the discount on the basis of the document issued by the supplier has been reversed by the recipient of the supply.
Conclusion
Navigating the GST landscape hinges on accurately determining the “Value of Supply.” Clear guidelines in Section 15 of the CGST Act cover scenarios from related parties to non-monetary transactions.
Rules like Rule 28 and Rule 27 ensure fair valuation in different contexts. Section 15(2) specifies inclusions, from taxes to subsidies, while Section 15(3) clarifies the treatment of discounts.
Mastering these rules is crucial for businesses to ensure GST compliance, fostering transparent and lawful transactions within the GST framework.
