Valuation under GST (Value of Taxable Supply)

Relevant Sections & Rules & Circular:-

Sections:-

Section 15 of CGST Act, 2017:- Value of Taxable Supply.

Rules:-

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

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

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

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

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

Rule 31A:- Value of supply in case of lottery, betting, gambling and horse racing.

Rule 32:- Determination of value in respect of certain supplies.

Rule 32A:- Value of supply in cases where Kerala Flood Cess is applicable.

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

Rule 34:- Rate of exchange of currency, other than Indian rupees, for determination of value.

Rule 35:- Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax.

Circular:-

Circular No. 92/11/2019-GST Dt. 07.03.2019.

INTRODUCTION:-

Every fiscal statute makes provision for the determination of value as tax which is normally payable on ad-valorem basis. In GST also, tax is payable on ad-valorem basis i.e. percentage of value of the supply of goods or services. Section 15 of the CGST Act and Determination of Value of Supply, CGST Rules, 2017 contain provisions related to valuation of supply of goods or services made in different circumstances and to different persons.

DEFINITIONS:-

1) Related persons:- Related persons means,

(a) Such persons are members of the same family.

(b) Such persons are employer and employee.

(c) Such persons are legally recognised partners in business.

(d) Such persons are officers or directors of one another’s businesses.

(e) One of them directly or indirectly controls the other.

(f) Together they directly or indirectly control a third person.

(g) Both of them are directly or indirectly controlled by a third person.

(h) Any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them.

(i) 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.

                                "The term “person” also includes legal persons"

2) Agent:- As per section 2(5) of CGST Act, 2017 “agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

3) Pure Agent:- Pure agent means a person who,

(a) Enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both.

(b) Neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply.

(c) Does not use for his own interest such goods or services so procured.

(d) Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

VALUE OF TAXABLE SUPPLY:-

The value of a taxable supply of goods or services or both shall be the "TRANSACTION VALUE".

Transaction Value:- It is a combination of three elements.

"Price actually paid or payable for the supply (+) Supplier and the recipient of the supply are not related (+) Price is the sole consideration for the supply"

INCLUSION:-

(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.

(c) 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.

(e) Subsidies received by supplier except subsidies provided by the Central Government and State Governments.

EXCLUSION:-

The "DISCOUNT" is only one element that shall be excluded from taxable supply.

(a) Discount given before or at the time of the supply:- Exclude provided such discount has been duly recorded in the invoice issued in respect of such supply.

(b) Discount given after the supply has been effected:- Exclude provided following conditions are satisfied,

* 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

* Input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

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

* Open market Value.

* Consideration in money (+) Amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply.

* Value of supply of goods or services or both of like kind and quality.

* 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. (Rule 30)

* Reasonable means. (Rule 31)

E.g.:-

(a) Where a new phone is supplied for twenty thousand rupees along with the exchange of an old phone and if the price of the new phone without exchange is twenty four thousand rupees, the open market value of the new phone is twenty four thousand rupees.

(b) Where a laptop is supplied for forty thousand rupees along with the barter of a printer that is manufactured by the recipient and the value of the printer known at the time of supply is four thousand rupees but the open market value of the laptop is not known, the value of the supply of the laptop is forty four thousand rupees.

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

* Open market Value.

* Value of supply of goods or services or both of like kind and quality.

* 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. (Rule 30)

* Reasonable means. (Rule 31)

* 90% of price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. (This is applicable where goods are intended for further supply by the recipient.) (Also this is an optional for supplier)

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

* Open market Value.

* 90% of price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. (This is applicable where goods are intended for further supply by the recipient.) (Also this is an optional for supplier)

* 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. (Rule 30)

* Reasonable means. (Rule 31)

E.g.:-

(a) A principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of five thousand rupees per quintal on the day of the supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of four thousand five hundred and fifty rupees per quintal. The value of the supply made by the principal shall be four thousand five hundred and fifty rupees per quintal or where he exercises the option, the value shall be 90 per cent. of five thousand rupees i.e., four thousand five hundred rupees per quintal.

Rule 31A:- Value of supply in case of lottery, betting, gambling and horse racing.

* {(face value of ticket or the price as notified in the Official Gazette by the Organising State, whichever is higher)*100/128}

                The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator.

Rule 32:- Determination of value in respect of certain supplies. (This rule is optional for Supplier)

A) The value of supply of services in relation to the purchase or sale of foreign currency, including money changing:-

                                                                                                OPTION 1.

(1) When currency exchange in Indian rupee,

                (a) When RBI Rate is available:- {(RBI Rate (-) buying rate or the selling rate, as the case may be)*total units of currency}

                (b) When RBI Rate is not available:- 1% of the gross amount of Indian Rupees provided or received by the person changing the money.

(2) When currency exchange is not in Indian rupee,

               

                (a) First Currency * RBI Rate

                (b) Second currency * RBI Rate

                Taxable value:- {1% * ("a" or "b" whichever is lower)}

                                                                                                OPTION 2.

(1) 1% of the gross amount of currency exchanged for an amount up to one lakh rupees, subject to a minimum amount of two hundred and fifty rupees.

(2) Rs.1,000/- (+) 0.5% of the gross amount of currency exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees.

(3) Rs. 5,500/- (+) 1/10% the gross amount of currency exchanged for an amount exceeding ten lakh rupees, subject to a maximum amount of sixty thousand rupees.

B) The value of the supply of services provided by an air travel agent to airlines:-

                5% of the basic fare in the case of domestic bookings.

                                                AND

                10% of the basic fare in the case of international bookings.

"Basic fare" means that part of the air fare on which commission is normally paid to the air travel agent by the airlines.

C) The value of supply of services in relation to life insurance business:-

(1) The gross premium charged from a policy holder (-) the amount allocated for investment, or savings on behalf of the policy holder, if such an amount is intimated to the policy holder at the time of supply of service.

(2) 10% of single premium charged from the policy holder (In case of single premium annuity policies other than (1)).

(3) 25% of the premium charged from the policy holder in the first year AND 12.5% of the premium charged from the policy holder in subsequent years. (In case of other cases)

               

This rule shall not be applicable where the entire premium paid by the policy holder is only towards the risk cover in life insurance.

D) The value of supply in buying and selling of second hand goods:-

Value of Taxable Supply:- Selling price (-) buying price.

                Where the value of such supply is negative, it shall be ignored.

Above rule shall be apply provided following conditions are satisfied.

                (a) Second hand goods does not change the nature of the goods after minor processing. AND

                (b) No input tax credit has been availed on the purchase of such goods.

                Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

E) The value of a token, or a voucher, or a coupon, or a stamp (other than postage stamp) which is redeemable against a supply of goods or services or both shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.

F) The value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in section 25, where input tax credit is available, shall be deemed to be NIL.

Rule 32A:- Value of supply in cases where Kerala Flood Cess is applicable:-

                The value of supply of goods or services or both on which Kerala Flood Cess is levied under clause 14 of the Kerala Finance Bill, 2019 shall be deemed to be the value determined in terms of section 15 of the Act, but shall not include the said cess.

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

The expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied,

                (a) The supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient.

                (b) The payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service.

                (c) The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

E.g.:- Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for the registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A‘s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

Rule 34:- Rate of exchange of currency, other than Indian rupees, for determination of value:-

                (a) For Goods:- Rate of exchange notified by Custom on the date of time of supply of such goods.

                (b) For Service:- Rate of exchange determined as per the generally accepted accounting principles for the date of time of supply of such services.

Rule 35:- Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax:-

                Tax amount = (Value inclusive of taxes * tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) ÷ (100+ sum of tax rates, as applicable, in %)

Clarification on treatment of sales promotion schemes under GST (Circular No. 92/11/2019-GST Dt. 07.03.2019):-

                It has been noticed that there are several promotional schemes which are offered by taxable persons to increase sales volume and to attract new customers for their products. Some of these schemes have been examined and clarification on the aspects of taxability, valuation, availability or otherwise of Input Tax Credit in the hands of the supplier (hereinafter referred to as the “ITC”) in relation to the said schemes are detailed hereunder.

A) Free samples and gifts:-

i) It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockiest, dealers, medical practitioners, etc. without charging any consideration. As per sub clause (a) of sub-section (1) of section 7 of the said Act, the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as "supply" under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as "supply" under GST, except where the activity falls within the ambit of Schedule I of the said Act.

ii) Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free samples falls within the scope of "supply" on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

B) Buy one get one free offer:-

i) Sometimes, companies announce offers like "Buy One, Get One free" For example, "buy one soap and get one soap free" or "Get one tooth brush free along with the purchase of tooth paste". As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as "supply" under GST (except in case of activities mentioned in Schedule I of the said Act). It may appear at first glance that in case of offers like "Buy One, Get One Free", one item is being "supplied free of cost" without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one.

ii) Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.

iii) It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

C) Discounts including "Buy more, save more" offers:-

i) Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume). For example- Get 10 % discount for purchases above Rs. 5000/-, 20% discount for purchases above Rs. 10,000/- and 30% discount for purchases above Rs. 20,000/-. Such discounts are shown on the invoice itself.

ii) Some suppliers also offer periodic / year ending discounts to their stockiest, etc. For example-Get additional discount of 1% if you purchase 10,000 pieces in a year, get additional discount of 2% if you purchase 15,000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as "volume discounts". Such discounts are passed on by the supplier through credit notes.

iii) It is clarified that discounts offered by the suppliers to customers (including staggered discount under "Buy more, save more" scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of section 15 of the said Act, (See EXCLUSION in VALUE OF TAXABLE SUPPLY IN THIS ARTICLE) including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.

iv) It is further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

D) Secondary Discounts:-

i) These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example, M/s A supplies 10,000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.

ii) The provisions of sub-section (1) of section 34 of the said Act provides as under,

                “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

iii) whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act, (See EXCLUSION in VALUE OF TAXABLE SUPPLY IN THIS ARTICLE) are not satisfied. It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act, (See EXCLUSION in VALUE OF TAXABLE SUPPLY IN THIS ARTICLE) are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

iv) It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act, (See EXCLUSION in VALUE OF TAXABLE SUPPLY IN THIS ARTICLE) are not satisfied.

v) There is no impact on availability or otherwise of ITC in the hands of supplier in this case.