Valuation Under GST Law

Value of Supply Under GST

Consideration:

  • Payment made for the inducement of, the supply of goods and/or services
  • The monetary value of any act or forbearance
  • Deposit, whether refundable or not, not be considered unless applied

Incurred By Recipient:

  • Not included in the price
  • The value of such goods and/ or services as are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost
  • Royalties and license fees

Taxes:

  • Shall include all taxes other than SGST or the CGST or the IGST

Incidental Expenses:

  • Commission and packing
  • Any amount charged for anything done by the supplier in respect of the supply of goods and/or services at the time of, or before delivery of the goods or, as the case may be, supply of the services

Subsidies:

  • Which is linked to supply

Reimbursement:

  • All reimbursement shall be included

Discount Before Time of Supply:

  • Allowed only if it is in the course of normal trade practice
  • And has been duly recorded in the invoice

Discount After Time of Supply:

  • Allowed only if such post supply discount is established as per the agreement and is known at or before the time of supply l Specifically linked to relevant invoices
  • Specifically linked to relevant invoices

Provisions related to valuations will invite lots of confusion. In case of discount before the time of supply, same shall be allowed only if the same is as per the normal trade practice. There is no clarity on whether the normal trade practice in the market where the supplier is situated is to be considered or in the market where the receiver is situated is to be considered. Further, normal trade practice is a subjective phrase and very difficult to quantify unless concrete rules are framed. Similarly, discount given post the time of supply shall be allowed if such post-supply discount is established as per the agreement and is known at or before the time of Supply and the same is linked with specific invoices. There is no need to prove that such discount is in line with the normal trade practice as is required in line with the normal trade practice as is required in pre-time of supply discount.

We do not understand the rationale behind allowing the discount only if the same is as per the normal trade practice. GST is a value added tax where all the participants pay the tax on the value added by them by claiming the tax credit on the purchases. Hence eventually Government gets the tax on the final sale value of the goods/services. Restricting allowance of discount only to the extent of normal trade practice is very regressive step which will result in unwarranted litigation.

Inclusion of royalties and license fees also defeats the purpose of ideal GST as the provider of such royalties and license fees shall be paying GST on the final sale value which will include the cost of royalties and license fees. GST

GST Valuation Rules

  • Transaction Value
  • Value by Comparison
  • Computed Value Method
  • Residual Method
  • Rejection of declared value

Valuation Rules, 2016 provides for four methods for doing the valuation in cases other than where supplier and receiver are not related and price is the sole consideration of sale. The transaction value can even be rejected as per Rule 7 if the officer has reason to doubt about the truth or accuracy of the value declared.

FAQs On Valuation Under GST

Are there separate valuation provisions for CGST, SGST and IGST and Goods and Services?

Ans. No, section 15 is common for all three taxes and also common for goods and services.

Is contract price not sufficient to determine valuation of supply?

Ans. Contract price is more specifically referred to as ‘transaction value’ and that is the basis for computing tax.

However, when the price is influenced by some factors like relationship of parties or certain transactions are deemed to be supply, which do not have a price, it is required to overcome these factors to determine the transaction value correctly.

Is reference to Valuation Rules required in all cases?

Ans. No. Reference to Valuation Rules is required only in cases listed under section 15(4) i.e., where consideration payable is not money, or parties to the transaction are related.

What is to be done if there are certain factors affecting price though the transaction is not covered by section 15(4)?

Ans. Section 15(2) provides the list of adjustments that may be made to make the price of a transaction reliable for purposes of determining tax payable.

Can the transaction value declared under section 15(1) be accepted?

Ans. Yes, it can be accepted after examining for inclusions in section 15(2). Furthermore, the transaction value can be accepted even where the supplier and recipient are related, provided the relationship has not influenced the price. (Rule 3(4) of draft GST valuation rules)

Whether post-supply discounts or incentives are to be included in the transaction value?

Ans. Yes. Unless the post-supply discount is established as per the agreement and is known at or before the time of supply and specifically linked to relevant invoice.

Whether pre-supply discounts allowed before or at the time of supply are includible in the transaction value?

Ans. No, provided it is allowed in the course of normal trade practice and has been duly recorded in the invoice.

When are Valuation Rules applicable?

Ans. Valuation Rules are applicable when (i) Consideration not in money terms; (ii) parties are related or supply by any specified category of supplier; and (iii) transaction value declared is not reliable.

What are the reasons for doubting transaction value declared?

Ans. The reasons have been indicated in Rule 7(b) of the draft GST Valuation Rules. It is:-

(i) comparable supplies are at significantly higher value;

(ii) transaction is at significantly lower or higher than market value of supplies; and

(iii) misdeclaration in parameters like description, quantity, quality, year of make etc. The list is indicative and not exhaustive.

What are the methods provided for determining the value, in terms of draft GST Valuation Rules?

Ans. Three methods are prescribed under GST Valuation 62 Rules for determining the transaction value i.e., comparative method, computation method and residual method, which are required to be followed sequentially. Besides, some specific valuation methods have been specified like in case of pure agents and money changers. Further specific rules may later be notified in case of Insurer, Air travel Agent and distributor or selling agents of lottery.

What are the inclusions specified in Section 15(2) which could be added to Transaction Value?

Ans. The inclusions specified in Section 15(2) which could be added to Transaction Value are as follows:

a) Any amounts paid by recipient that are obligation of supplier to pay;

b) Money value of goods or services provided free or at concession by recipient;

c) Royalties and license fees payable by recipient as a condition of supply;

d) Taxes levied under any other law(s) (other than SGST / CGST or IGST);

e) Expenses incurred by supplier before supply and charged separately;

f) Subsidy realized by supplier on the supply;

g) Reimbursements claimed separately by supplier;

h) Discounts allowed ‘after’ supply except when known before supply; (Discounts allowed as a normal trade practice and reflected on the face of the invoice shall not be included).

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