Valuation Rule for Supply Under Goods and Services Tax (GST) in India

Introduction

The Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services. Determining the value of this supply is crucial for calculating the correct amount of GST payable. Section 15 of the Central Goods and Services Tax (CGST) Act, 2017, along with the relevant rules, lays down the principles and methods for valuing taxable supplies. This article provides a detailed overview of these valuation rules, accompanied by practical examples to enhance understanding.

Core Principle: Transaction Value (Section 15(1))

The primary basis for valuing a taxable supply of goods or services or both is the transaction value. This 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.

Key Conditions for Applying Transaction Value

Unrelated Parties: The supplier and the recipient of the supply should not be related. The term “related persons” is defined under the GST law and includes individuals who are officers or directors of one another’s businesses, legally recognized partners, employers and employees, any person directly or indirectly owning, controlling or holding twenty-five per cent or more of the outstanding voting stock or shares of both of them, etc.

Sole Consideration: The price paid or payable must be the only consideration for the supply. If there are any other non-monetary considerations, the transaction value may not be the sole basis for valuation.

Inclusions in Transaction Value (Section 15(2))

The transaction value includes the following, if not already included in the price:

• Taxes, Duties, Cesses, Fees, and Charges: Any tax, duty, cess, fee, or charge levied under any law other than the CGST Act, SGST Act, UTGST Act, IGST Act, and GST Compensation Cess Act, if charged separately by the supplier.
  Example: A manufacturer sells goods for ₹10,000 and separately charges ₹500 as excise duty (which is now subsumed under GST but for understanding the principle). The transaction value for GST will be ₹10,500.
• Amounts Payable by the Supplier but 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.
  Example: A software developer agrees to provide services for ₹50,000. The contract stipulates that the client will bear the cost of mandatory software licenses required for the project, which the developer was originally supposed to pay. If the client pays ₹5,000 for these licenses directly, this amount will be included in the transaction value, making it ₹55,000.
• Incidental Expenses: Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply.
  Example: A wholesaler sells goods for ₹20,000 and charges an additional ₹500 for packing and ₹1,000 as commission. The transaction value will be ₹21,500.
• Interest or Late Fee or Penalty for Delayed Payment: Any amount charged as interest or late fee or penalty for delayed payment of the consideration for any supply.
  Example: A supplier sells goods for ₹30,000 with a condition that if payment is delayed beyond 30 days, a late fee of ₹300 will be charged. If the payment is delayed and the supplier charges the late fee, the transaction value for the supply will be considered as ₹30,300.
• Subsidies Directly Linked to the Price: Subsidies directly linked to the price, excluding subsidies provided by the Central Government and State Governments.
  Example: A manufacturer sells a product for ₹15,000. A private organization provides a subsidy of ₹2,000 directly linked to the price, which reduces the price for the customer to ₹13,000. The transaction value for GST will be ₹15,000 (before the private subsidy). However, if the subsidy was provided by the Central Government, the transaction value would be ₹13,000.

Exclusions from Transaction Value (Section 15(3))

The transaction value does not include the following:

Discounts Given Before or at the Time of Supply: Any discount which is given before or at the time of supply if such discount has been duly recorded in the invoice issued in respect of such supply.
Example: A retailer offers a 10% discount on the marked price of ₹5,000 at the time of sale. The invoice will show the discounted price of ₹4,500. The transaction value for GST will be ₹4,500.

Discounts Given After the Supply: Any discount which is given after the supply has been effected, if:

• Such discount is established in terms of an agreement entered into at or before the time of such supply.
• Specifically linked to relevant invoices.
• Input tax credit, as is attributable to the discount on the basis of such invoices, has been reversed by the recipient of the supply.

Example: A manufacturer agrees to give a quantity discount of 2% to a dealer if the dealer achieves a certain sales target within a quarter. After the quarter ends, the dealer achieves the target, and the manufacturer issues a credit note for the discount. The dealer will have to reverse the input tax credit attributable to this discount for it to be excluded from the original transaction value.

Valuation Rules When Transaction Value is Not Acceptable (Rule 27 to Rule 31 of CGST Rules, 2017)

When the supplier and the recipient are related, or the price is not the sole consideration for the supply, the transaction value may not be acceptable. In such cases, the following rules are applied for valuation:

Rule 28: Valuation of Supply Between Distinct or Related Persons, Other Than Through an Agent

The value shall be the open market value of such supply.
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.
If the value is not determinable under (a) or (b), the value shall be as determined by applying rule 30 or rule 31 in that order.
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged by the recipient for the supply of goods of like kind and quality to their customer who is not a related person.

Example: A company has two branches in different states (distinct persons). One branch supplies goods to the other. The valuation will be based on the open market value of similar goods. If not available, then based on the price charged by the receiving branch to an unrelated customer for similar goods (90% option available).

Rule 29: Valuation of Supply of Goods Made or Received Through an Agent

The value of the supply of goods made or received through an agent shall be:
The open market value of the goods being supplied by the principal or received by the principal through the agent.
If the open market value is not available, ninety percent of the price charged by the agent for the supply of goods of like kind and quality to a recipient who is not a related person.
If the value is not determinable under clause (a) or clause (b), the value shall be determined by applying rule 30 or rule 31 in that order.

Example: A principal supplies goods to an agent who then sells them to customers. The valuation of the supply from the principal to the agent will be based on the open market value or 90% of the price charged by the agent to an unrelated customer.

Rule 30: Valuation of Supply of Goods Based on Cost

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, 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 unique product is manufactured for internal use by a related entity, and its open market value is not available. The valuation can be done at 110% of the cost of production.

Rule 31: Valuation of Supply of Goods Based on Residual Method

Where the value of supply of goods or services or both cannot be determined under rules 27, 28, 29, or 30, the value shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and these rules.

Example: This rule is applied in exceptional cases where none of the other methods are suitable. It allows for a reasonable valuation based on available information and GST principles.

Rule 31A: Valuation of Supply of Services in Certain Cases

This rule provides specific valuation methods for certain services like lottery, betting, gambling, etc.

Conclusion

Understanding the valuation rules under GST is essential for businesses to correctly determine their tax liability. The primary method is the transaction value, provided the conditions of unrelated parties and sole consideration are met. Various inclusions and exclusions affect the transaction value. When the transaction value is not acceptable, specific rules are prescribed based on open market value, value of like kind and quality, cost-based valuation, or a residual method. By carefully applying these rules and considering the specific circumstances of each supply, businesses can ensure compliance with the GST regulations. It is always advisable to consult with tax professionals for specific guidance on valuation matters.