Valuation of Supplies in GST

Legend

Unless otherwise stated, Section in the chapter refers to relevant Section of Central Goods and Services Tax Act, 2017 and Rule refers to Central Goods and Services Tax, Rules 2017.

Background

Section 15 of Central Goods and Services Tax Act read with Central Goods and Services Tax Rules, 2017 lays down the principles of valuation, for goods and services. Similar provisions are adopted by Integrated Goods and Services Tax Act, 2017, Union Territory Act, 2017 and Respective Acts and Rules of various States.

Essentially, following principles of valuation are to be applied in three buckets, depending on the nature of supply:

1. Inclusions and Exclusions in the Value of Supply

For each of the above buckets, while determining the value of supply, following amounts are to be included/excluded in/ from transaction value:

Further, as per Rule 33 expenditure/costs incurred by a Supplier as a ‘Pure Agent’ of the Recipient shall be excluded, if following conditions are specified—

1. Supplier acts as a “Pure Agent” of Recipient, while making payment to Third Party;
2. Payment made by a Pure Agent, separately indicated in the Invoice;
3. Supplies procured by the Pure Agent from third party are in addition to the services supplied on his own account.
   Meaning of “Pure Agent” as explained in the explanation of the rule is the person who:
   1. 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;
   2. 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
   3. does not use for his own interest such goods and/or services so procured; and
   4. receives only the actual amount incurred to procure such goods and/or services in addition to the amount received for supply he provides on his own account.

2. Value of Supply to Non-related Persons

1. Where the price is the sole consideration – the Transaction value
2. Where the price is not the sole consideration: Rule 27 prescribes the following in sequential order:
   1. Open market value of such supply
   2. Consideration in money equivalent amount of consideration not in money
   3. Value of supply of like kind and quality
   4. Sum total of consideration in money and such further amount in money that is equivalent to consideration not in money

3. Value of Supply to Agents, Related Persons or between Distinct Persons

Valuation for supply between a person (being a principal) and his agent (other than sole agent), is prescribed in Rule 29, while valuation of supply between related persons (including sole agent) or between distinct persons is prescribed in Rule 28 – both of which Rules require determination of value as per Rule 30 or Rule 31 in specified situations.

Explanation to Section 15 of the CGST Act, explains the term ‘Related Person’, which states that person shall be related persons if—

1. persons are officers or directors of one another’s businesses;
2. are legally recognised partners in business;
3. are employer and employee;
4. 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;
5. one of them directly or indirectly controls the other;
6. both of them are directly or indirectly controlled by a third person;
7. together they directly or indirectly control a third person or they are members of the same family

The term “related parties” also includes legal persons and persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, of the other.

Rules 28 to 31 also provide for ‘sequential’ method of arriving at valuation summarised in the table below:

Second proviso to Rule 28 provides that “If the Recipient is eligible for Full Input Tax Credit — the value declared in invoice shall be deemed to be the Open Market Value of goods or services”. Inclusion of this provision shall avoid possible valuation disputes with Department in above situations.

4. Option to Determine Value of Notified SuppliesSection 15(5) states cases where Recipient may or may not be related or price may or may not be the sole consideration, supplier has option to determine the taxable value as per the method prescribed in Rule 32 for such notified supply.

5. Rate of Exchange and Value Inclusive of GST

Rule 34 provides Rate of exchange of currency, other than Indian rupees, for determination of value of taxable goods and services shall be—

6. Value of supply which is inclusive of Integrated Tax, Central Tax, State Tax, Union Territory Tax

Rule 35, provides that where value of supply is inclusive of GST,

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

Input Tax Credit (ITC)

Input Tax Credit or to say ITC mechanism is the backbone of any system of Value Added Taxation (VAT). Goods and Services Tax (GST), being based upon the principles of VAT, it has to provide for an appropriate mechanism by which the basic concept of VAT remains intact. As we are well aware, GST is a destination based tax, the burden of tax has to be borne by the ultimate consumer of goods or services as the case may be. Neither there should be any cascading of taxes nor any burden of such tax should fall on businesses.

Businesses, in any country, operate through a chain of people performing different activities, and, sometimes it is a very long chain between origin of goods and its consumption in the hands of ultimate consumer. An importer or manufacturer may be the first person in the chain of production and distribution of goods. Thereafter, there may be a distributor, a stockist, a wholesaler or a trader and the retailer, etc. Thus, before the goods reach the hands of ultimate consumer, they pass through various hands, and, each such person may be adding some value to such goods whether by way of enhancing its utility or otherwise whereby the price of such goods gets increased at each stage in that chain of production and distribution.

To take a simple example suppose a manufacturer sells his goods at 100 rupees, the distributor adds his expenses of transportation, etc. and after adding his margin sells at 110, wholesaler sells at 120 rupees and the retailer sells the same goods to the consumer at 150 rupees. And if the rate of tax applicable is 10%, the consumer is required to pay 15 rupees by way of tax (10% of 150), the Government should get this 15 rupees in its treasury neither less nor more. One method of collection of tax may be that Government collects 15 rupees directly from the retailer and all other persons i.e., manufacturer, distributor, wholesaler, etc. need not collect or pay any tax. Such a system is called last stage taxation, which was prevailing long back but discontinued due to large scale of revenue leakages. The system of first stage taxation (i.e. collecting the intended amount of tax from the manufacturer himself), which was there under the earlier sales tax laws, had to be discontinued because of low tax base, and the MRP based system of collecting taxes from the first stage dealer also does not find favour under a fair and equitable system of taxation. However the system of VAT provides all such benefits which we can expect from a fair and transparent system of taxation. Under this system, taxes are collected at each stage of production and distribution at a predetermined rate of tax. Thus, in the above example: the manufacturer has to collect a sum of ₹ 10 (10% of 100) from his purchaser (the distributor). He has to deposit the same amount into Government treasury. The distributor will collect ₹ 11 (10% of 110) from the wholeselar. As he has already paid ₹ 10 to the manufacturer, he will deposit ₹ 1 into the treasury (11-10). Here ₹ 11 is the amount of output tax and ₹ 10 is the input tax credit. Similarly, wholesaler will collect ₹ 12 (10% of 120) and will pay into the treasury ₹ 1 (i.e. 12-11) and the retailer will collect ₹ 15 from the consumer (10% of 150) and he will deposit a net sum of ₹ 3 (15-12) into the treasury. Thus, Government will get a total sum of ₹ 15 (10+1+1+3) through all these persons involved in the production and distribution chain. The consumer has paid ₹ 15 as tax for consuming the product, the Government is getting the exact amount into its treasury, and, none of the businesses have paid any amount out of their own pocket. They have deposited the entire amount of tax that they have collected from their customer after deducting therefrom the amount of tax which they have already paid through their supplier/s. Neither any gain nor any loss to the businesses. Thus, the amount of tax paid on supplies received in the business may be considered as advance payment of tax, which in VAT terminologies is called as Input Tax Credit. (Credit of taxes paid on inputs).

This concept of ITC is not new to all those who have been dealing with Excise Duty, Service Tax and State VAT laws, wherein it already exits either partially or fully in the form of CENVAT and setoff, etc. But, as these taxes are being levied at different stages and by different Government/s, there is no inter connectivity of these taxes and therefore taxes paid under one or more enactments are not cenvatable against the other. It is fragmented VAT, which is in practice in our country at present.

The Indian GST law i.e., the Central Goods and Services Act (CGST Act), IGST Act, UTGST Act as well as State GST Acts contain elaborate provisions regarding input tax credit and claim thereof by eligible taxable persons. The Rules made there under provide conditions for such claim. As the provisions and the conditions are on the same line in all such enactments, the provisions contained in CGST Act and the Rules are discussed as follows: