GST Valuation and its Practical Issues
- Blog|GST & Customs|
- 9 Min Read
- By Taxmann
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- Last Updated on 30 August, 2022
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Table of Contents
4. Inclusions/Exclusions from Transaction Value
4.1 Inclusion in transaction value and the conditions thereon
4.2 Exclusion from transaction value and the conditions thereon
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1. Introduction
Value of supply under GST (CGST & SGST/UTGST or IGST) is levied on the value as determined u/s 15 of the CGST Act, 2017. Determination of correct value of supply is of utmost importance to levy proper tax.
As per the provisions of Section 15 of the CGST Act, value of a supply under GST shall be the transaction value. ‘Transaction Value’ here means the price actually paid or payable for the supply of goods and/or services. However, adoption of transaction value for the purpose of GST levy is subject to fulfillment of two conditions:
- Supplier and the recipient of the supply are not related64; and
- Price is the sole consideration for the supply.
If both the above conditions are not satisfied, then the value shall be determined in the manner prescribed in Chapter IV of the CGST Rules, 2017 containing Rules 27 to 35. The Government has also reserved the right to specify valuation methods in respect of such supplies as may be notified by it on the recommendation of the GST Council.
In GST, the valuation principles under central excise for goods and under service tax for services have been adopted. Market value concepts of customs have also been added.
2. Meaning of Related Persons
Though section 2 of the CGST Act is the definition section, the term ‘Related persons’ is not defined there. Rather, it has been defined in Explanation to Section 15 and states that ‘for the purposes of this Act:
(a) persons shall be deemed to be “related persons” if:
i. such persons are officers or directors of one another’s businesses;
ii. such persons are legally recognised partners in business;
iii. such persons are employer and employee;
iv. any person directly or indirectly owns, controls or holds twenty-five per cent. (25%) or more of the outstanding voting stock or shares of both of them;
v. one of them directly or indirectly controls the other;
vi. both of them are directly or indirectly controlled by a third person;
vii. together they directly or indirectly control a third person; or
viii. they are members of the same family;
(b) the term “person” also includes legal persons;
(c) 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.
Valuation of supply between distinct or related persons:
- Not through an agent- As per Rule 28
- Through an agent: As per Rule 29
3. Practical Issues
Issue # 1: Transactions between two companies where directors are common
Mr. X & Mr. Y are directors in two companies, Company ‘A’ and Company ‘B’. They hold 20% shares in each of these companies. Company ‘A’ enters into a transaction to supply goods to Company ‘B’. Whether valuation in this case will be as per transaction value under section 15(1) or these companies shall be deemed to be related persons under clause (a) (i) of explanation to section 15?
Ans: Yes, Company A and B are related persons as per the above provisions since X and Y are common directors in both the companies.
Issue # 2: Transaction between the firm and its partners
Mr. ‘X’ is a partner in ‘XYZ & Co.’ with 15% share. If any supply takes place between XYZ & Co. and Mr. ‘X’, whether it will be deemed to be a supply between related persons under clause (a) of above explanation?
Ans: Explanation to Section 15 states that Control is deemed to exist only if the person owns 25% or more shares in the entity. In the above case, shareholding is 15% and thus control does not exist. However, since Mr. X is a legally recognized partner in XYZ & Co., the firm and Mr. X are related persons.
Issue # 3: Transaction between two firms where husband is partner in one firm and wife is partner in another firm
Mr. X is a partner in ‘XYZ & Co.’ with 30% share. His wife is a partner in another partnership firm ‘ABC & Co.’ with 40% share. If any supply takes place between XYZ & Co. and ABC & Co., whether both these firms shall be deemed to be related person under clause (a)(v) of above explanation on the ground that Mr. X indirectly controls ABC & Co. through his wife?
Ans: Explanation to Section 15 states that Control is deemed to exist if:
“(iv) any person directly or indirectly owns, controls or holds twenty-five per cent (25%) or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other”
In the above situation, though X and Y does not directly control both the firms, but individually control one firm each. And since X and Y are husband and wife in relation, it can always be said that both have indirect control over both the firms. Thus, in the opinion of author, both the firms are related to each other as per the provisions of CGST Act, 2017.
Issue # 4: Transaction between a partnership firm and a proprietorship firm where father is a partner in the partnership firm and son is the proprietor of the proprietorship firm
Mr. X is a partner in ‘XYZ & Co.’ with 30% share. His son Mr. Y is a proprietor of ‘ABC & Co.’. If any supply takes place between XYZ & Co. and ABC & Co., whether it shall be deemed to be a transaction between related person under clause (a) (viii) of above explanation? Whether both can be held members of same family?
Ans: In the opinion of the author, Son is a close relative and thus covered by the term family. Thus, both XYZ & Co. and ABC & Co. are related parties.
Issue # 5: How to determine ‘control’?
Clause (a)(iv) to clause (a)(vii) of the above explanation determine ‘related person’ from the control perspective. However, the term ‘control’ is not defined under the GST law. As per the definition given by Cambridge Dictionary, Control means:
“the act of controlling something or someone, or the power to do this”
(Source: https://dictionary.cambridge.org)
Section 2(27) of the Companies Act, 2013 defines ‘Control’ as under:
(27) “control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
Thus, control is said to exist if any person or entity is able to implement any particular decision in an organization. However, it must be understood that ownership is not necessary for control. Control is said to exist if decisions can be influenced directly or indirectly in any manner whether with ownership or otherwise.
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4. Inclusions/Exclusions from Transaction Value
4.1 Inclusion in transaction value and the conditions thereon
| Sl. No. | Inclusion | Condition |
| (a) | any taxes, duties, cesses, fees and charges levied under any law other than GST | If charged separately by the supplier |
| (b) | any amount incurred by the recipient | Which supplier was liable to pay and not included in the price |
| (c) | Any amount charged by the supplier | (i) For incidental expenses including commission, packing etc.; and
(ii) for anything done in respect of the supply at the time of or before delivery of goods or supply of services |
| (d) | interest or late fee or penalty | For delayed payment of consideration |
| (e) | Subsidies directly linked to the price | Other than Central/State Government subsidies. [The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy] |
4.1.1 Practical Issues
Issue # 1: Levy of freight charges by the supplier of goods
Company ‘A’ issued an invoice to Company ‘C’ for sale of an item worth ` 1,00,000 applying GST @ 5%. Further, freight charges of ` 20,000 was also levied in the same invoice. What shall be the GST Rate on freight charges, 5% or 12% or 18%?
Ans: In the instant case, Company ‘A’ has charged freight in the same invoice so the supply transactions fall within the definition of ‘composite supply’ and thus GST Rate of 5% shall be applicable on entire ` 1,20,000.
Issue # 2: Levy of freight charges by the supplier of goods; Invoices containing items of different GST rates
Company ‘A’ issued a single invoice for sale of three items to Company ‘C’- ` 50,000 @ 5% GST, ` 60,000 @ 12% & ` 40,000 @ 18%. These items are independent and not related to each other. Further, Company ‘A’ levied freight charges of ` 25,000 in the same invoice against all these items? What shall be the GST Rate on freight charges, 5% or 12% or 18%?
Ans: In the instant case, the supply transaction cannot be termed as a composite supply as the goods are independent items and thus cannot be termed as naturally bundled. Further, it is also not a mixed supply as they can be sold separately and that there is no single price for the items, but all are having their own individual prices.
Company ‘A’ is charging freight in the same invoice for all the items taken together. So, a question arises as to what GST Rate is to be charged in the freight. In the opinion of the authors, GST Rate should be charged proportionately as per the value of individual items as under:
| Items | Taxable Value | Freight Value | GST Rate on Freight | GST on Freight |
| 5% Item | 50,000 | 8,333 | 5% | 417 |
| 12% Item | 60,000 | 10,000 | 12% | 1,200 |
| 18% Item | 40,000 | 6,667 | 18% | 1,200 |
| Total | 1,50,000 | 25,000 | 2,817 |
4.2 Exclusion from transaction value and the conditions thereon
| Sl. No. | Exclusion (Any discount) | Condition |
| (a) | given before or at the time of the supply | if such discount is duly recorded in the invoice issued in respect of such supply |
| (b) | given after the supply has been effected | (i) if such discount is:
(ii) The recipient has reversed the input tax credit (ITC) attributable to such discount on the basis of document issued by the supplier. |
5. Promotional Schemes
The Central Board of Indirect Taxes and Customs (In short ‘CBIC’), GST Policy Wing issued Circular No. 92/11/2019-GST, dated 07.03.2019 whereby it has issued following clarification on various doubts with respect to tax treatment of sales promotion schemes under GST:
| Clarification (w.r.t. value of supply) | Clarification (w.r.t. ITC availability) |
| 5.1 Free Sample & Gifts [Para 2A of Circular] | |
| Samples such as drug samples provided by pharma companies to stockists, dealers, medical practitioners etc. which are supplied free of cost (FOC), 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. | No ITC to the supplier to the extent inputs/input services and capital goods are used in relation to the free samples and gifts. However, where such activity falls within Schedule-I, supplier would be eligible to avail of the ITC. |
| 5.2 Buy one Get one free offer [Para 2B of Circular] | |
| Example: ‘buy one soap and get one soap free’ or ‘Get one tooth brush free along with the purchase of tooth paste’.
It may appear at first glance that in case of such offers, one item is being ‘supplied FOC 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. Taxability will depend on 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 CGST/SGST Act. |
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. |
| 5.3 Discounts including ‘Buy more, save more’ offers [Para 2C of Circular] | |
| Involves staggered discounts to customers or periodic/year-end discounts to stockists etc.
1. Staggered discounts to customers (Increase in discount rate with increase in purchase volume): For example- Get 10% discount for purchases above ` 5000, 20% discount for purchases above ` 10,000 and 30% discount for purchases above ` 20,000. Such discounts are shown on the invoice itself. 2. Periodic/year-end discounts to stockists etc. In commercial parlance, also known as “volume discounts”]: For example- Additional discount of 1% if purchase 10000 pieces in a year or additional discount of 2% if purchase 15000 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. Such discounts are passed on by the supplier through credit notes. Above discounts shall be excluded to determine the value of supply provided they satisfy the parameters down in section 15(3) 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. |
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. |
Also Read:
Valuation of Supply under GST
Valuation under the Customs Act
Valuation under the Customs Act
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