Understanding GST Determination of Value of Supply Rules
The Goods and Services Tax (GST) regime came a step closer to meet its 1st July target of rollout, on 29th March 2017 with the Lok Sabha approving four supplementary legislations. CGST Bill 2017, IGST Bill 2017, UTGST Bill 2017 and The Goods & Service Tax (Compensation to States) Bill 2017 passed by Lok Sabha on 29th Mar 2017 as Money Bills. Immediately passage of the Bills, Government released draft Rules as under:
1. Input Tax Credit Rules
2. Valuation Rules
3. Transition Rules
4. Composition Rules
5. Revised Invoice Rules
6. Revised Payment Rules
7. Registration Rules
8. Refund Rules
9. Return Rules
Valuation rules are one of the very important rules which will enable the taxable person to ascertain the value of supply on which GST will be payable.
Section 15 of CGST Act provides for value of supply as under:
15. (1) 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 of the supply are not related and the price is the sole consideration for the supply.
Sub rule 2 & 3 prescribes inclusions and exclusions from value of supply
(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
Hence incase the Value of supply is not as per section 15(1) the value shall be determined in such manner as prescribed. The manner in which such value will be determined is prescribed under GST Determination of Value of Supply, Rules
GST Determination of Value of Supply, Rules will be applicable in following cases
- Supply of goods or services where the consideration is not wholly in money
- Supply of goods or services or both is in between distinct or related persons
- Supply of goods or services or both when price is not the sole consideration
- Supply of goods or services or both in respect of certain supplies
Rule 1 Value of supply of goods or services where the consideration is not wholly in money
For consideration other than wholly in money, Value shall be :
a) Open market Value of the goods / service supplied or
b) If open market value is not available in such case Money received plus money as equivalent to consideration not received
c) In case value cannot be determined by above mentioned methods then value of supply of like kind & quality.
d) In case the value cannot be determined on the basis of like kind & quality then the value as per rule 4 (Cost + 10%) & 5 (Residual value method) in sequential manner.
For this purpose explanations to rules prescribes
1. "open market value" of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.
The open market value has below important components,
i) Value for a transaction when Supplier & recipient are not related will be taken
ii) In case of such transaction price should be sole consideration
iii) The comparable transaction should be at the same time
iv) The value will not include any taxes & cess.
There are certain issues arising as the word used are "Open Market Value". Whether only transaction with respect to taxable person will be considered or the value may be derived from the market. E.g. If A sells to B @ Rs 1,000 & to C who is related party @1,200 whereas the open market price is Rs 1,100 whether the value to unrelated buyer @Rs1,000/- will be considered or open market price of Rs 1,100/-.
In case of multiple supplies which value to be considered ?
in the same example above if A has also sold to D @Rs1,150, then which value to be considered. There also will be price difference on account of volume. How to deal in such situations is not clear from the draft.
2. "supply of goods or services or both of like kind and quality" means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.
Similar Concept of identical & similar goods brought from earlier Customs rules.
Rule 2 Value of supply of goods or services or both between distinct or related
Value incase of supply of Goods or Services or both between Distinct (having multiple registrations in different or within states) or Related shall be :
a) Open market Value of the goods / service supplied or
b) In case value cannot be determined by above mentioned methods then value of supply of like kind & quality.
c) In case the value cannot be determined on the basis of like kind & quality then the value as per rule 4 (Cost + 10%) & 5 (Residual value method) in sequential manner
Incase the recipient is eligible for full ITC the Invoice value will be deemed to be open market value.
The valuation of supply between distinct and related persons will get covered in this clause. By virtue of the provisio the Invoice value will be accepted as open market price and the Valuation as determined by the registered person will be accepted as valuation unlike earlier Excise laws which mandated for different valuation methods. This will reduce lot of litigation in valuation which is revenue neutral in broader sense.
Rule 3 Value of supply of goods made or received through an agent -
Valuation in case of Supply through agent will be :
a) Open Market Value
b) 90% of value charged of goods of like kind & quality to unrelated customer by the agent where goods are intended for further supply at the option of supplier
c) In case the value cannot be determined on the basis of above then the value as per rule 4 (Cost + 10%) & 5 (Residual value method) in sequential manner.
Rule 4 Value of supply of goods or services or both based on cost
If value is not determined under rules 1 to 4, Value will be determined using reasonable means consistent with the principles and general provisions of section 15 and these rules
Similar provision in excise laws pertaining CAS-4 for goods is extended to Trading & Services. Cost of Manufacture / Production / Acquisition or Cost of provision of such services will be computed as per Cost Accounting Standards issued by Institute of Cost Accountants of India
Rule 5 Residual method for determination of value of supply of goods or services or both
If value is not determined under rules 1 to 4, Value will be determined using reasonable means consistent with the principles and general provisions of section 15 and these rules
However, Supplier of service may opt for this rule by passing rule 4 (i.e. Cost + 10%).
Rule 6 (1) Determination of value in respect of certain supplies –
Valuation in the specified supplies should be under this rule over riding the Rules & Act
Rule 6 (2) The value of supply of services in relation to purchase or sale of foreign currency, including money changing,
Valuation in the specified supplies should be under this rule over riding the rules & Act
Value of supply will be -
a) Difference in buying & Selling RB reference rate at that time multiplied by total units of currency, If RBI reference rate is not available 1% of gross amount
b) At the option of supplier value will be deemed to be 1% of gross amount exchanged for amount upto INR 1 Lakh subject to minimum INR 250/-
INR 1,000/- +0.5% of gross amount exchanged for amount more than 1 Lakh upto 10 Lakhs
INR 5,000/- +0.1% of gross amount exchanged exceeding 10 Lakhs subject to max Rs 60,000/-
Option to ascertain value in terms of clause (b) shall not be withdrawn during the remaining part of that financial year
Rule 6 (3) The value of supply of services in relation to booking of tickets for travel by air provided by an air travel agent
Value of supply of services in relation to booking of tickets -
for Domestic Booking - 5 % of Basic Fare
for International Booking - 10 % of Basic Fare
"basic fare" means that part of the air fare on which commission is normally paid to the air travel agent by the airline
Rule 6 (4) The value of supply of services in relation to life insurance business
Value of supply of services in relation to life insurance business shall be:
(a) the gross premium reduced by the amount allocated for investment, or savings if such amount is intimated to the policy holder at the time of supply of service;
(b) in case of single premium annuity policies other than (a), 10% premium; or
(c) in all other cases, 25% of the premium in the first year and 12.5% of the premium charged in subsequent years:
If entire premium paid by the policy holder is only towards the risk cover in life insurance these provisions will not be applicable.
Rule 6 (5) Value of supply provided by a person dealing in buying and selling of second hand goods
Value of supply provided by a person dealing in buying and selling of second hand goods if no ITC is availed shall be :
Difference between Selling price & Purchase price If difference is negative then value should be ignored (taken as zero)
Rule 6 (6) Value of a token, or a voucher, or a coupon, or a stamp which is redeemable
The value of a token, or a voucher, or a coupon, or a stamp which is redeemable shall be equal to the money value of the goods or services redeemable against such voucher.
6 (7) The value of taxable services provided by such class of service providers
Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business will be valued NIL
Rule 7: Value of supply of services in case of pure agent
Concept of Pure agent in Service Tax is carried forward in GST. Expenditure incurred as Pure Agent shall be excluded from value of Supply
Rule 8: Rate of exchange of currency, other than Indian rupees, for determination of value
The rate of exchange for determination of value of taxable goods or services or both shall be the reference rate for that currency as determined by the RBI on the date when point of taxation.
The draft rules are published and comments are invited till 10th April 2017. Hence trade & Industry after carefully understanding the implications should make necessary representations to the Government. Professional have important role to make Industry & Trade understand the rules and how it will bring changes in the present business scenario.
Author CMA Harshad S Deshpande is Practicing CMA from Pune. He is also Regional Council Member of WIRC of ICAI.
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