Valuation of Supply under GST: A Comprehensive Guide by DisyTax

The Goods and Services Tax (GST) regime in India operates on the principle of taxing the value of supply of goods and services. Determining this value accurately is fundamental for businesses to calculate their GST liability correctly, claim the right amount of input tax credit, and ensure compliance with the law. Incorrect valuation can lead to penalties, interest charges, and potential legal hassles.

The Cornerstone: Understanding Transaction Value in GST

The primary method for determining the value of supply under GST is the transaction value. According to Section 15(1) of the CGST Act, 2017, the value of supply of goods or services or both shall be the price actually paid or payable for the said supply where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

In simpler terms, the transaction value is the invoice price, provided that the buyer and seller are not related parties and the price is the only thing being exchanged for the goods or services.

Example 1: ABC Ltd. sells goods to XYZ Corp. for ₹10,000. ABC Ltd. and XYZ Corp. are unrelated entities, and ₹10,000 is the only consideration for the goods. In this case, the value of supply is ₹10,000.

What to Include in Your GST Value of Supply

While the transaction value forms the base, certain elements need to be included to arrive at the correct taxable value. Section 15(2) of the CGST Act specifies these inclusions:

1. Taxes, Duties, Cesses, Fees, and Charges (Excluding GST):
Any taxes, duties, cesses, fees, or charges levied under any law other than the GST laws, if charged separately by the supplier, must be included in the value of supply.

Example 2: If ABC Ltd. charges an environmental tax of ₹200 on the invoice along with the price of ₹10,000, the value of supply will be ₹10,000 + ₹200 = ₹10,200.

2. Supplier Liabilities Incurred by the Recipient:
Any amount that the supplier is liable to pay in relation to the supply but which has been incurred by the recipient and not included in the price must be added to the value of supply.

Example 3: XYZ Corp., the buyer, agrees to pay the freight charges of ₹500 on behalf of ABC Ltd., which was originally the supplier’s responsibility. This ₹500 will be included in the value of supply.

3. Incidental Expenses:
Incidental expenses, such as commission and packing charges, that are charged by the supplier to the recipient must be included in the value of supply.

Example 4: ABC Ltd. charges ₹300 for packing the goods sold to XYZ Corp. The value of supply becomes ₹10,000 + ₹300 = ₹10,300.

4. Interest and Late Payment Fees:
Any interest or late fee or penalty charged for delayed payment of the consideration for the supply must be added to the value of supply.

Example 5: If XYZ Corp. delays the payment and ABC Ltd. charges an interest of ₹100, this ₹100 will be included in the value of supply for the period it pertains to.

5. Subsidies (Excluding Government Subsidies):
Subsidies directly linked to the price, other than subsidies provided by the Central Government and State Governments, are to be included in the value of supply.

Example 6: If a private organization provides a subsidy of ₹500 to XYZ Corp. on the purchase, and this subsidy is directly linked to the price, then the value of supply will be ₹10,000 + ₹500 = ₹10,500.

Permissible Exclusions from GST Value of Supply

While certain elements are included, the GST law also allows for specific exclusions from the transaction value under certain conditions:

1. Discounts Before or at the Time of Supply:
Any discount that is given before or at the time of supply and has been duly recorded in the invoice is allowed as a deduction from the value of supply.

Example 7: ABC Ltd. offers a 5% discount on the listed price of ₹10,000, which is clearly mentioned on the invoice. The value of supply will be ₹10,000 – (5% of ₹10,000) = ₹9,500.

2. Post-Supply Discounts:
Discounts given after the supply has been effected are also allowed as a deduction, provided the following conditions are met:

• Such discount is established in terms of an agreement entered into at or before the time of such supply.
• Specific invoices can be linked to the discount.
• The recipient has reversed the input tax credit attributable to such discount.

Example 8: ABC Ltd. agrees to give a quantity discount of 2% to XYZ Corp. if they purchase more than 100 units in a month. If XYZ Corp. meets this target, ABC Ltd. can issue a credit note for the discount, and XYZ Corp. will need to reverse the corresponding ITC.

Navigating Valuation Rules When Transaction Value Isn’t Applicable

In situations where the transaction value cannot be determined because the supplier and recipient are related, or the price is not the sole consideration, or for certain specific types of supplies, the GST law prescribes specific valuation rules under Rule 27 to Rule 35 of the CGST Rules, 2017. These rules provide alternative methods to arrive at the value of supply.

Overview of Alternative Valuation Methods

When the transaction value is not applicable, the value of supply shall be determined using the following methods in sequential order, if applicable:

• Open Market Value: The price at which the same goods or services of like kind and quality are supplied at the same time to unrelated buyers.
• Value of Supply of Goods or Services of Like Kind and Quality: If the open market value is not available.
• Sum of Cost of Supply and Markup (Cost Plus 10%): If the above two are not available, the value shall be the cost of supply plus a markup of 10%.
• Residual Method (Rule 31): If none of the above methods are applicable, the value can be determined using reasonable means consistent with the principles and general provisions of Section 15 and the rules.
• Specific Rules for Certain Supplies (Rule 32): For specific supplies like lottery, actionable claims, money changing, etc., specific valuation rules are prescribed.
• Value in Respect of Certain Supplies Where Consideration is Not Wholly in Money (Rule 27): When the consideration is not entirely monetary, the value is determined based on various methods.
• Value of Supply Between Distinct or Related Persons, Other Than Through an Agent (Rule 28): The value is determined as per prescribed methods.
• Value of Supply of Goods Made or Received Through an Agent (Rule 29): Specific rules apply based on the agent’s authorization.
• Value of Supply in Case of Supply of Services Where Consideration is Not Wholly in Money (Rule 30): Similar to Rule 27 for services.
• Value of Supply in Respect of Purchase or Sale of Second-Hand Goods (Rule 32(5)): Allows valuation on the margin.

Deep Dive into GST Valuation Rules

Let’s explore some of these alternative methods in more detail:

1. Open Market Value: Determining Fair Price
The open market value represents the price at which identical goods or services are traded between unrelated parties under similar conditions. This is the preferred alternative when the transaction value is not applicable.

Example 9: A manufacturer supplies goods to a related distributor. The open market value of similar goods sold to unrelated parties around the same time is ₹12,000. The value of supply for the transaction with the related distributor will be ₹12,000.

2. Value of Supply of Like Kind and Quality: Benchmarking Similar Transactions
If the open market value of the exact goods or services is not available, the value of supply of goods or services of like kind and quality can be used.

Example 10: If the exact model of machinery supplied to a related party has no open market value, but a very similar model from another manufacturer is sold for ₹50,000, this value can be considered for valuation.

3. Cost Plus 10% Markup: Calculating Value Based on Cost
When neither open market value nor the value of like kind and quality is available, the value of supply can be determined by taking the cost of production or cost of provision of such goods or services and adding a markup of 10%.

Example 11: A service provider offers a unique service with no comparable market value. The cost of providing the service is ₹8,000. The value of supply can be calculated as ₹8,000 + (10% of ₹8,000) = ₹8,800.

4. The Residual Method: Valuation by Reasonable Means
Rule 31 acts as a last resort when none of the other methods can be applied. It allows for the determination of value using reasonable means consistent with the principles of GST valuation. This method requires careful justification and documentation.

Specific Valuation Scenarios Under GST

Certain types of supplies have specific valuation rules:

• Transactions Between Related or Distinct Persons: Open market value or the value of like kind and quality is preferred. If not available, use the cost plus 10% rule or the residual method.
• Supply for Consideration Not Wholly in Money (Barter): The value is the open market value, or if not available, the value of like kind and quality, or the sum of money and the money value of the non-monetary consideration.
• Valuation of Second-Hand Goods: A special scheme allows taxable value to be the margin (difference between the selling price and the purchase price), provided no ITC was availed on the purchase.
• Valuation of Lottery, Betting, and Gambling: The value of supply is the face value of the ticket or the total amount paid for the bet.
• Valuation of Other Actionable Claims: The value of supply is the consideration received for the transfer of the actionable claim.

Practical Implications and Challenges in Valuation

Determining the correct value of supply can be challenging, especially in complex transactions or when dealing with related parties. Businesses need to carefully analyze the nature of the supply, the relationship between the parties, and the availability of relevant data to apply the appropriate valuation method. Proper documentation and record-keeping are crucial to justify the valuation adopted and to avoid potential scrutiny from tax authorities.

Simplify GST Valuation with DisyTax

DisyTax understands the complexities involved in GST valuation and offers a comprehensive solution to help businesses navigate these challenges effectively. Our software provides features designed to streamline the valuation process:

• Pre-defined Rules and Templates: DisyTax incorporates the various valuation rules prescribed under GST, making it easier for users to select the appropriate method based on the nature of their transactions.
• Accurate Handling of Inclusions and Exclusions: The software allows for the accurate inclusion of additional charges and the application of permissible discounts as per GST regulations.
• Support for Diverse Valuation Methods: DisyTax supports different valuation methods, including open market value, cost-plus markup, and other specific rules, providing flexibility for various business scenarios.
• Seamless Integration and Reporting: DisyTax integrates seamlessly with your accounting systems, ensuring accurate data flow and generating comprehensive reports for GST compliance.
• User-Friendly Interface: Our intuitive interface simplifies the process of entering transaction details and applying valuation rules, reducing the risk of errors.

Why Accurate Valuation is Non-Negotiable for GST Compliance

Accurate valuation of supply is paramount for GST compliance. Incorrect valuation can lead to:

• Underpayment of GST: Resulting in penalties and interest charges.
• Overpayment of GST: Tying up working capital unnecessarily.
• Incorrect Input Tax Credit Claims: Leading to potential disallowance of ITC.
• Legal Disputes and Notices: From tax authorities due to discrepancies in valuation.

Conclusion

Mastering the principles and rules of GST valuation is crucial for every business operating in India. While the transaction value serves as the primary basis, understanding the inclusions, exclusions, and the alternative valuation methods applicable in specific scenarios is essential for accurate compliance. DisyTax provides a robust and user-friendly platform to simplify the complexities of GST valuation, empowering businesses to calculate their tax liabilities correctly and efficiently. Embrace the power of DisyTax to ensure accurate GST valuation and stay ahead in your compliance journey. Contact us today to learn more about how DisyTax can streamline your GST processes.