Decoding CGST Rules: Chapter 4 – Determination of Value of Supply under GST

Understanding how the value of supply is determined under GST is fundamental for every business. It directly impacts your tax liability. Chapter 4 of the Central Goods and Services Tax (CGST) Rules, 2017, lays down the detailed procedures and methods for this determination. This article breaks down each rule within this chapter in an easy-to-understand manner, complete with examples to help you navigate this crucial aspect of GST.

The Foundation: Section 15 of the CGST Act

Before diving into the rules, it’s important to remember that these rules are framed based on Section 15 of the CGST Act, 2017. This section states that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient are not related and the price is the sole consideration for the supply.

However, when these conditions are not met, or in specific scenarios, the rules in Chapter 4 come into play to determine the value of supply.

Let’s explore the rules in detail:

Rule 27: Value of supply of goods or services where the consideration is not wholly in money

This rule applies when the consideration for a supply is not entirely in monetary form. It provides a hierarchy of methods to determine the value:

(a) Open Market Value: The value shall be the open market value of such supply. This is the price at which similar goods or services are supplied to unrelated customers at the same time.

Example: A company exchanges an old machine for a new one. The open market value of the new machine is ₹50,000. The value of supply of the new machine will be ₹50,000.

(b) Value of Supply of Like Kind and Quality: If the open market value is not available, the value shall be the value of supply of goods or services of like kind and quality. This refers to the price of similar goods or services with the same or closely resembling characteristics.

Example: A graphic designer provides website design services to a client in exchange for photography services. If there’s no open market value for either service, the value of the website design service can be determined based on the price charged by another graphic designer for similar website design services.

(c) Sum of Consideration in Money and Money Equivalent: If the value cannot be determined by (a) or (b), the value shall be the sum of the consideration in money and the money equivalent of the non-monetary consideration. The money equivalent is determined based on prevailing market rates.

Example: A person provides a service for ₹10,000 in cash and also receives a gold coin worth ₹5,000 as part of the consideration. The value of supply will be ₹10,000 + ₹5,000 = ₹15,000.

(d) Value Determined by Rules 30 or 31: If none of the above methods are applicable, the value shall be determined using the cost-based method (Rule 30) or the residual method (Rule 31). We will discuss these rules later.

Rule 28: Value of supply of goods or services or both between distinct or related persons, other than through an agent

This rule addresses transactions between distinct or related persons (as defined under the GST Act), excluding supplies made through an agent. In such cases, the transaction value might not be considered the sole consideration. The following methods are used:

(a) Open Market Value: The value shall be the open market value of such supply.

Example: A company has two branches in different states (considered distinct persons). One branch supplies goods to the other. If the open market value of these goods is ₹20,000, then the value of supply will be ₹20,000.

(b) Value of Supply of Like Kind and Quality: If the open market value is not available, the value shall be the value of supply of goods or services of like kind and quality.

Example: If the exact goods supplied between the distinct branches are not sold to unrelated parties, the value can be determined based on the price of similar goods sold in the open market.

(c) Cost Plus Ten Percent: If neither (a) nor (b) is available, the value shall be the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services plus ten percent.

Example: If a manufacturing unit transfers goods to its depot (both distinct persons) and the cost is ₹10,000, the value of supply will be ₹10,000 + (10% of ₹10,000) = ₹11,000.

(d) Value Determined by Rule 30 or 31: If none of the above methods are applicable, the value shall be determined using the cost-based method (Rule 30) or the residual method (Rule 31).

Important Consideration: If the recipient is eligible for full input tax credit (ITC), the value declared in the invoice shall be deemed to be the open market value.

Rule 29: Value of supply of goods made or received through an agent

This rule deals with the valuation of goods supplied or received through an agent. An agent is someone who carries out the supply on behalf of the principal. The value of supply of goods between the principal and his agent shall be the open market value of the goods being supplied or the value of supply of goods of like kind and quality.

Example: A principal supplies goods worth ₹15,000 to his agent for onward supply. The open market value of these goods is ₹16,000. The value of supply between the principal and agent will be ₹16,000.

If the value cannot be determined as above, it shall be ninety percent of the price at which the agent sells the goods of like kind and quality on behalf of the principal or any other person.

Example: If the open market value is not available, and the agent sells similar goods for ₹20,000, the value of supply between the principal and agent can be taken as 90% of ₹20,000, which is ₹18,000.

Rule 30: Value of supply of goods or services or both based on cost

This rule comes into play when the value of supply cannot be determined using the methods described in Rules 27, 28, or 29. The value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Example: A specialized service provider offers a unique service for which there is no comparable open market value or like kind and quality. The cost incurred in providing the service is ₹20,000. The value of supply will be ₹20,000 + (10% of ₹20,000) = ₹22,000.

Rule 31: Residual method for determination of value of supply of goods or services or both

This rule is the last resort for determining the value of supply when all other methods fail. In such cases, the value shall be determined using reasonable means consistent with the principles and the general provisions of Section 15 and these rules. This provides flexibility to the tax authorities to determine a fair value based on the available information.

Example: Consider a very unique and rare item being supplied for which none of the previous valuation methods are applicable. The tax authorities, after considering all relevant factors and principles of GST valuation, might determine a reasonable value for the supply.

Rule 31A: Value of supply in case of lottery, betting, gambling or horse racing

For lottery, the value of supply shall be the face value of the ticket or the price at which it is sold by the State Government or by the lottery distributor or selling agent, as the case may be.

Example: The face value of a lottery ticket is ₹100. The value of supply will be ₹100.

For betting, gambling or horse racing, the value of supply shall be the total amount of bet or the total amount paid to the totalisator or the total amount of consideration received by the bookmaker from the person placing the bet in that betting, gambling or horse racing.

Example: A person places a bet of ₹500 on a horse race. The value of supply will be ₹500.

Rule 32: Determination of value in respect of certain supplies

(1) Supply of services in relation to booking of tickets for air travel, rail travel, etc.: The value of supply shall be deemed to be:

• Five percent of the basic fare in the case of domestic bookings.

• Ten percent of the basic fare in the case of international bookings.

Example: An air travel agent books a domestic flight for ₹10,000 (basic fare). The value of supply of the agent will be 5% of ₹10,000 = ₹500.

(2) Supply of services of a money changer: The value of supply shall be determined in any of the following ways, at the option of the supplier:

• Option 1: The difference between the buying rate and the selling rate of the currency multiplied by the amount of currency exchanged.

• Option 2: For each currency, one percent of the gross amount of currency exchanged.

• Option 3 (RBI approved): As per the regulations issued by the Reserve Bank of India.

Example (Option 1): If a money changer buys USD at ₹75 and sells at ₹76. If a customer exchanges USD 1,000, the value of supply is (₹76 – ₹75) * 1000 = ₹1,000.

(3) Value of supply in respect of goods taken out of India for exhibition or on consignment basis: The value of supply shall be the value declared in the invoice.

(4) Value of supply of taxable services in case of life insurance business: The value of supply shall be:

The gross premium charged from a policyholder less the amount allocated for investment, if any.

In case of single premium annuity policies other than (a), ninety percent of the single premium charged from the policyholder.

Example: A life insurance policy has a gross premium of ₹20,000, out of which ₹5,000 is allocated for investment. The value of supply will be ₹20,000 – ₹5,000 = ₹15,000.

(5) Value of supply of second hand goods: In case of a registered person dealing in buying and selling of second-hand goods, the value of supply shall be the difference between the selling price and the purchase price. If the difference is negative, it shall be ignored.

Example: A dealer buys a used car for ₹2,00,000 and sells it for ₹2,20,000. The value of supply will be ₹2,20,000 – ₹2,00,000 = ₹20,000.

(6) Value of supply of services by a tour operator: The value of supply shall be deemed to be:

• Twenty percent of the gross amount charged for packages including accommodation and transportation.

• Five percent of the gross amount charged for packages where only transportation is included.

Example: A tour operator offers a package including accommodation and transportation for ₹50,000. The value of supply will be 20% of ₹50,000 = ₹10,000.

Rule 33: Value of supply of services in case of pure agent

A “pure agent” is someone who incurs expenditure on behalf of the recipient of the supply but does not hold any title to the goods or services procured. The value of services provided by a pure agent excludes the expenses reimbursed, subject to certain conditions:

• The supplier acts as a pure agent of the recipient of the supply when he makes the payment to the third party for the goods or services procured.
• The recipient of the supply is liable to make payment to the third party.
• The supplier merely acts as a conduit between the recipient and the third party.
• The supplier has obtained the prior authorization of the recipient to make the payment.
• The payment made by the supplier on behalf of the recipient has been separately indicated in the invoice issued by the supplier to the recipient.
• The supplier recovers from the recipient only the actual amount paid to the third party.

Example: An architect hires a specialized testing laboratory on behalf of his client for a project. The client is liable to pay the laboratory charges. The architect pays ₹10,000 to the lab and separately indicates this in his invoice to the client, recovering only ₹10,000. In this case, the ₹10,000 will be excluded from the value of supply of the architect’s services.

Rule 34: Value of supply of taxable services in case of money changing services

This rule is essentially covered under Rule 32(2), providing the methods for determining the value of supply for money changing services.

Rule 35: Value of supply including tax

Sometimes, the price charged for a supply might include the GST amount. In such cases, the value of supply needs to be determined by excluding the tax component. The formula for this is:
Value of Supply = (Price including GST) / (1 + GST Rate)
Example: A product is sold for ₹1,180 (inclusive of GST at 18%). The value of supply will be ₹1,180 / (1 + 0.18) = ₹1,180 / 1.18 = ₹1,000. The GST amount will be ₹1,180 – ₹1,000 = ₹180.

Conclusion

Chapter 4 of the CGST Rules provides a comprehensive framework for determining the value of supply under various circumstances. Understanding these rules is crucial for accurate tax calculation and compliance under GST. By carefully analyzing the nature of your transactions and applying the appropriate valuation methods as outlined in these rules, businesses can ensure they are meeting their GST obligations correctly.

We hope this detailed explanation has helped you understand the intricacies of determining the value of supply under GST. Stay tuned to disytax for more informative articles on GST and other tax-related topics!