Value of Taxable Supply of Goods or Services under GST

Topics covered in this article are as follows:

1. Transaction value is basis for valuation

2. Discount or incentive given after supply

3. Meaning of ‘consideration’

4. Meaning of ‘related person’

5. Rate of exchange of currency for determination of value

6. Determination of value when value not ascertainable

GST on Works Contract & Real Estate Transactions provides complete & updated coverage of the subject matter incorporating issues pertaining to Projects, TDR, Development Rights, FSI, Leasing & Renting along with Numerical Illustrations

1. Transaction value is basis for valuation

The value of a supply of goods or services or both shall be the transaction value, that 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 – section 15(1) of CGST and SGST Act.

Conditions for accepting transaction value for valuation – The conditions for accepting transaction value are –
(a) supplier and recipient should not be related
(b) price is sole consideration.

1.1 Value does not include GST but includes other taxes

Any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the IGST Act or GST (Compensation to States for Loss of Revenue) Act; are includible in value, if charged separately – section 15(2)(a) of CGST Act.

Thus, SGST and CGST will be payable on net value only.

‘Value’ for GST will not include IGST, CGST, SGST, UTGST and GST Compensation Cess. However, other taxes (like entertainment tax or some other cess) will be includible if charged separately in invoice.

‘Value’ does not include TCS under Income Tax Act – The Value does not include Tax Collected at Source under Income Tax Act, as TCS is not a tax on goods but an interim levy on income – para 5 of CBI&C circular No. 76/50/2018-GST dated 31-12-2018 as amended vide corrigendum No. 20/16/04/2018-GST dated 7-3-2019.

What is meant is that if amount of invoice is 100 and TCS is Rs 2, GST is payable on 100 and not 98.

Value for payment of IGST, CGST and SGST in Kerala State would not include Kerala Flood Cess – As per rule 32A of CGST Rules inserted w.e.f. 28-6-2019, Value for payment of IGST, CGST and SGST will not include Kerala Flood Cess payable under clause 14 of Kerala Finance Bill, 2019.

1.2 Amount paid by recipient on behalf of supplier

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 is includible in value – section 15(2)(b) of CGST Act.

This cannot cover free inputs or services supplied by recipient, as only ‘amount’ paid by recipient on behalf of supplier is includible. This would be so only where there was contractual liability on supplier to make those supplies.

However, if amount was contractual liability of supplier but paid by recipient on his behalf, that amount will be includible in ‘value’ for purpose of payment of GST.

Even if this amount is addible in value, obviously payment will not be received in respect of this amount from recipient. Normally, if payment is not received from recipient, proportionate input tax credit has to be reversed as per section 16(2) of CGST Act. However, in such cases, it will be deemed that the payment has been received. Thus, reversal of proportionate input tax credit will not be required – second proviso to rule 37(1) of CGST Rules, inserted w.e.f. 13-6-2018.

This second proviso should apply with retrospective effect, though the rule does not specifically say so.

Contract includes value of material but some material supplied by recipient and value deducted from bill of supplier – In GVS Projects P Ltd. In re (2020) 82 GST 459 = 117 taxmann.com 911 (AAR-AP), the contract with customer included value of material. However, some material was supplied by recipient and its value was recovered from running bill of supplier. It was held that value of materials recovered on cost recovery basis by the contractees from RA Bills of contractor is includible in value of supply as per section 15(2)(b) of CGST Act [In my view, contractee should issue tax invoice to contractor, so that contractor can take ITC of GST charged to him by contractee].

1.3 Incidental expenses incurred before supply

Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply, including 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 the goods or, as the case may be, supply of the services are includible in value – section 15(2)(c) of CGST Act.

Thus, expenses like weighment, loading in factory, inspection, testing before supply will be includible in ‘value’. Design charges incurred before supply will also be includible.

1.4 Interest, late fee or penalty for delayed payment

Interest or late fee or penalty for delayed payment of any consideration for any supply is includible in value – – section 15(2)(d) of CGST Act.

The term ‘delayed’ obviously means ‘delay beyond agreed terms’. This interpretation can also be justified because the word ‘interest’ has been used with the words ‘late fee’ or ‘penalty’. This is on the principle of ‘Noscitur a sociis’- Meaning of a word should be gathered from its context i.e. by associate words.

Thus, GST should not be leviable on normal interest payable by recipient as per agreed terms of contract.

This is also justifiable from the fact that ‘interest’ is an exempt supply as per Notification No. 12/2017-CT (Rate) and No. 9/2017-IT (Rate) both dated 28-6-2017, effective from 1-7-2017.

GST on penal interest on EMI (Equated Monthly Instalment) – Often loan granted for purchase of goods is repaid in Equated Monthly Instalments (EMI). The EMI includes both principal and interest. If EMI is not paid within scheduled time, additional/penal interest is charged. CBI&C, vide circular No. 102/21/2019-GST dated 28-6-2019 has clarified as follows –

(a) If the seller himself grants EMI instalments – In this case, if the seller charges penal interest, it will be part of value of goods as per section 15(2)(d) of CGST Act and GST will be payable by seller, even if charged separately at rate applicable to sale of goods.

(b) If loan is provided by finance company directly to the buyer – If loan is granted by finance company or Bank to buyer, the seller of goods is out of picture once sale is made. The buyer pays EMI and penal interest amounts to finance company/Bank. In this case, the interest (including penal interest) is exempt under Sr No. 27 of Notification No. 12/2017-CT (Rate) dated 28-6-2017.

In Infrastructure Development Finance Co. Ltd. v. ACIT [2019] taxmann.com 205 (Mad HC), it has been held that liquidated damages recovered from borrowers in case of default in case of payment of interest and other dues (which was 2.10%), was really ‘interest’. [Decision under section 10(23G) of Income-tax Act but principle can apply to GST)].

In a contrary view, it was held that Receipt of penal charges by finance companies on delayed payment of EMIs would be receipt of amounts for tolerating act of their customers for having delayed/defaulted on their EMI payments and would be taxable as supply as per Sr. No. 5(e) of Schedule II of CGST Act – Bajaj Finance Ltd., In re [2018] 99 taxmann.com 236 (AAR – Maharashtra).

Now this decision may not be valid in view of CBI&C circular, but would still be binding on applicant (unless set aside by competent authority) as departmental circular cannot override decision of AAR.

1.5 Tax payable when value is inclusive of GST

Legally, GST is to be indicated separately in tax invoice. However, provision has been made for situations where GST is not shown separately in tax invoice.

If value of supply is inclusive of IGST, CGST, SGST or UTGST, the tax payable will be calculated by back calculations as follows—

Tax amount = [Value inclusive of tax × Tax rate in % of IGST or CGST plus UTGST/SGST]/(100 + sum of applicable tax rates in %). – rule 9 of Valuation Rules – Rule 35 of CGST and SGST Rules, 2017.

Note that the provision applies only the value of supply included GST. The rule does not say that the value is deemed to be inclusive of GST.

For example, when GST is payable under reverse charge, the amount charged by supplier of goods or services cannot be taken as inclusive of GST.

Illustration – If value inclusive of IGST is Rs. 1180 and IGST rate is 18%, integrated tax amount (IGST) = (1,180 × 18)/(100+18) = 21,240/118 = 180. Value = 1,000. Check that value plus integrated tax = Rs. 1,180.

1.6 GST on outward freight, packing and other charges in tax invoice

In case of FOR basis contracts, the supplier arranges transport. In that case, he pays GST under reverse charge on outward freight. He then charges outward freight in the tax invoice. In such case, the outward freight charged is part of value of goods and GST is payable on value including outward freight. Similarly, packing charges, weighment charges and other charges are includible in value for levy of GST. The GST rate is same as applicable to goods, as this is a composite supply as per section 2(30) of CGST Act.

It is not correct to charge freight separately and charge GST @ 5% as the service of supplier of goods is not Goods Transport Agency Service at all.

In FAQ Nos. 28 and 29 of FAQ on Mining issued by Directorate General of Taxpayer Services on 31-7-2017. It has been clarified that in case of FOR contracts, it is a composite contract and GST is payable on outward freight (GST rate will be same rate as for goods, as clarified in FAQ No. 29). The supplier will pay GST on reverse charge on the freight charged by GTA and the credit of same will be available. – – In case of ex-works contract, the service tax on GTA will be paid by buyer under reverse charge and he can take its ITC. This will be so when goods are booked by supplier but freight is paid by recipient (buyer).

1.7 Subsidies directly linked to supply other than Government subsidies

Subsidies directly linked to the price excluding subsidies provided by the Central and State Governments are includible in ‘value’ for charge of GST.

Explanation.—The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy – section 15(2)(e) of CGST Act.

This is also made clear in definition of ‘consideration’ in section 2(31) of CGST Act.

2. Discount or incentive given after supply

The value of the supply shall not include any discount that is given:

(a) before or at the time of the supply provided such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, provided that
(i) 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
(ii) input tax credit as is attributable to the discount has been reversed by the recipient of the supply – section 15(3) of CGST Act.

Thus, discount after supply is permissible as deduction only if it was known before or at the time of supply.

There is provision of issue of ‘credit note’ for deficiency in supply. However, section 34(1) of CGST and SGST Act do not make provision for issue of credit note for passing of discount which was not contemplated at the time of supply.

Further, if incidence of GST and interest has been passed on to another person, reduction in output tax liability of the supplier shall not be permitted – proviso to section 34(2) of CGST and SGST Act.

Giving discounts and price reductions after supply of goods and services is not uncommon in business.

Supplier should issue credit note with GST – As per section 34 of CGST Act, debit note or credit note with GST can be issued only by supplier. Presently, one debit note can cover only one invoice. However, as per section 34(3) of CGST Act as amended vide CGST (Amendment) Act, 2018 w.e.f. 1-2-2019, one debit note can cover multiple invoices [ease of doing business].

In my view, he can issue credit note without GST if he does not want to disturb credit of GST taken by recipient. This view is confirmed in Para D of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.

However, if supplier does not issue credit note, recipient should issue debit note without charging GST. If he does not do so, it can be argued that the recipient has not made full payment to supplier and hence proportionate ITC is reversible. It may be noted that debit note and credit note are accounting methods of making and receiving payments.

There is ample case law that credit note issued by supplier means payment is made by recipient and payment is received by supplier.

If commercial credit note is issued by supplier, the recipient is not required to reverse ITC attributable to commercial credit note issued by supplier, as the supplier is not reducing his original tax liability – Santosh Distributors In re (2021) 88 GST 566 = 132 taxmann.com 15 (AAAR-Kerala).

No adjustment of GST on bad debts – There is no provision for adjustment of GST in case of bad debt – FAQ No. 48 issued by CBI&C on banking sector on 27-12-2018.

2.1 Quantity discounts – Buy more, save more – Discounts known before supply

In some cases, discounts are known before supply of goods or services but may be given after supply. In some case, staggered quantity discounts are offered based on quantity purchased by recipient.

Para C of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 clarifies as follows –

Discounts offered by 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) are excluded to determine value of supply if such discount fulfils requirements of section 15(3) of CGST Act. Recipient is required to reverse ITC. However, supplier is entitled to full ITC of inputs, input services and capital goods in relation to supply of goods or services or both on such discounts (i.e. it is not necessary to reverse ITC proportionate to such discounts).

2.2 ‘Buy one get one free’ or ‘one item free’ offers

Often there are schemes like two soaps at the price of one or free tooth brush with tooth paste. Really, it is not ‘free supply’. In fact, it is case of two or more supplies with a single price. At the most, it can be treated as supply of two goods for the price of one. In such cases, rate of tax will depend on whether it is composite supply or mixed supply. Further, ITC will be available in relation to supply of goods or services or both as part of such offer Para B of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.

2.3 Discounts offered after supply – secondary discounts

Often, discounts are offered after supply of goods or services are made. Such discounts are not known before supply. In such cases, financial/commercial credit note(s) can be issued without GST. The recipient of goods or services can avail entire ITC of GST charged by supplier in his original invoice, without reversal of ITC – Para D of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 view reiterated in para 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Financial/commercial credit note means credit note other than that specified in CGST Rules, i.e. without any GST implication.

This is correct as credit note is one mode of adjusting liability and issue of credit note means payment has been received by supplier in full.

Post sale discounts without requiring dealer to do any further act – In some cases, post sales discounts are given by manufacturer or wholesaler (supplier) to dealer without any further obligation or action required at the dealer’s end. Such post sale discount will relate to original supply of goods. It would not be included in value of supply if conditions of section 15(3)(b) of CGST act are satisfied i.e. discount was known prior to supply. In such case, credit note with GST can be issued as per provisions of rule 53 of CGST Rules. If such discount was not known prior to supply, financial/commercial credit note can be issued without GST. In that case, reduction is GST liability is not possible, but the recipient of goods or services is not required to reverse the Input Tax Credit of tax charged to him in the invoice of supplier – paras 3 and 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Post Sale discount where dealer is required to do further act – In some cases, post sale discount is given by manufacturer/wholesaler to dealer requiring dealer to undertake further obligation like special sales drive, advertisement campaign, exhibition etc. In that case, the additional discount given is for undertaking such activity and would be in relation to service supplied by dealer to supplier of goods (manufacturer/wholesaler). In that case, the dealer will be liable to issue tax invoice to supplier (manufacturer/wholesaler) and charge GST. The supplier of goods (manufacturer/wholesaler) can take Input Tax Credit of such tax of GST charged to him by the dealer – para 3 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Additional post sale discount given by supplier to dealer to augment sales – In some cases, the dealer may have to sale the goods at lower prices (may be even below purchase price) to augment sales, due to market conditions. In such cases the supplier (manufacturer/wholesaler) gives additional discount to the dealer, to enable dealer to sale at lower prices. This additional discount is additional consideration by supplier of goods (manufacturer/wholesaler) to the dealer. The dealer would be liable to pay GST on that amount – para 4 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

The circular says that this additional consideration would be liable to be added to the consideration payable by the customer for the purpose of arriving value of supply in the hands of dealer. However, the final customer can get ITC only on basis of amount paid by him.

For example, normal sale price of a product is Rs 1,00,000. However, in view of market conditions, the dealer is able to sale the product only at Rs 75,000. In that case, the supplier (manufacturer/wholesaler) may give additional discount of (say) Rs 20,000 to the dealer. In that case, the dealer is liable to pay GST on Rs 95,000 [Rs 75,000 sale price plus Rs 20,000 additional consideration received in form of additional discount]. However, the customer will be eligible to avail ITC (if he is otherwise eligible) on Rs. 75,000 only (as confirmed in para 4 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019).

Practically, how this can be achieved?

The customer is not even aware of the additional discount given by manufacturer/wholesaler to the dealer. He is aware of only net price to be charged to him.

If the customer is not registered under GST or is not in position to avail ITC, tax invoice may be issued for Rs 95,000 with GST and simultaneously financial credit note without GST for difference [Rs 20,000 plus GST on Rs 20,000 – as customer will pay GST only on Rs 75,000] may be issued to customer.

If the customer is registered under GST and is in position to avail ITC, tax invoice may be issued on him for Rs 75,000 and simultaneously another tax invoice may be issued on supplier (manufacturer/wholesaler) for Rs 20,000 with GST.

2.4 Quantity Discount permissible

In some cases, quantity discount is given by way of additional supply e.g. 11 pieces are supplied for price of 10.

In Golden Tobacco Ltd., In re [2019] 106 taxmann.com 409 (AAR – Maharashtra), applicant, who was sellers of cigarettes, intended to offer extra quantity of cigarettes (quantity discount) in addition to normal quantity against same consideration as a taxable supply to its distributors. They intended to supply additional packs of cigarettes along with regular supply of cigarettes without receiving any additional consideration for additional packs. It was (indeed rightly) held that such extra packs of cigarettes wouldn’t be exigible to GST.

2.5 No unjust enrichment if discount amount returned to buyer by cheque or credit note

If credit note is issued after supply, its input tax credit can be adjusted in Electronic Credit Ledger.

Even otherwise, there is ample case law that if the discount amount is refunded by supplier by way of credit note or cheque, there is no unjust enrichment and refund is admissible.

Reversal of ITC not required if Post sale discounts offered – Para D of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 clearly states that the recipient of goods or services can avail entire ITC of GST charged by supplier in his original invoice in case of post sales discount – view reiterated in para 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

In a contrary view, in MRF Ltd., In re [2019] 73 GST 485 = 103 taxmann.com 278 (AAR-TN), applicant was getting post sale, post supply and post issue of invoices discount. Thus, the appellant was making net payment to supplier after deducting such discount. It was held that the appellant is required to reverse the ITC on such discount as full payment is not made to supplier.

3. Meaning of ‘consideration’

‘Consideration’ in relation to the supply of goods or services or both to any person, includes

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the said person or by any other person; but shall not include any subsidy given by Central or State Government.

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person, but shall not include any subsidy given by Central or State Government – section 2(31) of CGST Act.

Clause (b) would cover service of ‘refraining from act or tolerating an act or situation’.

3.1 Deposit is not consideration

A deposit, whether refundable or not, given in respect of the supply of goods or services or both shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply – proviso to section 2(31) of CGST Act.

Normally, term ‘deposit’ is used when amount is refundable and term ‘advance’ is used when amount is adjustable (and not refundable). However, definition of ‘consideration’ envisages non-refundable deposit also.

GST is payable when advance is received. Hence, instead of receiving advance from customer, it is advisable to receive ‘deposit’. In that case, GST will be payable only when such deposit is adjusted against supply.

However, this will raise issues under Companies Act, 2013.

No GST on interest free refundable deposits received – In Maharashtra E-Square Leisure (P) Ltd. In re (2019) 73 GST 547 = 104 taxmann.com 258 (AAR – Maharashtra), it has been held that no GST is payable on refundable interest-free security deposit received by lessor. However, if, at the time of return of deposit, some amount is withheld, GST will be payable on such amount.

However, this will raise issues under Companies Act, 2013.

GST on notional interest on interest free refundable deposit not includible – in Midcon Polymers (P.) Ltd., In re [2021] 123 taxmann.com 408 (AAAR-Karnataka), it has been held that notional interest on security deposit is not required to be added in taxable value of services, as there is no connection between interest paid by third person (bank) and the renting service supplied by owner of building.

[really no provision in law to consider ‘notional income’, except in case of related party transactions].

In a contrary view, in Rajkot Nagarik Sahakari Bank Ltd. In re (2019) 76 GST 397 = 108 taxmann.com 515 (AAR-Gujarat), it was held that GST is payable on notional interest on interest free refundable deposit.

3.2 Charity (Dharamada) is not includible in value

In D J Malpani v. CCE [2019] 106 taxmann.com 29 = 366 ELT 385 (SC 3 member bench), assessee was collecting dharamda (charity) separately in invoice. It was voluntary on purchasers. The charity amount collected was not taken as income of assessee. It was observed that dharamda is means ‘an alms or a gift in charity’. Dharamda is not includible in assessable value, as it is not consideration for sale [the decision in case of Central Excise but principle should apply under GST also].

3.3 Free supplies made by recipient to supplier

GST is on ‘supply of goods and services’. The scope of ‘supply’ is a contract between supplier and recipient. Only those elements of cost will form ‘value’ which are in the contract of scope of supply.

The tax is on ‘supply’ and not on ‘goods or services’ as such. Thus, only what is supplied should be added to ‘value’.

Further, addition of these amounts to ‘value’ is against the concept of Input Tax Credit principle, as some costs will be added to ‘value’ on which the supplier will not be able to avail any input tax credit.

This will also be against the second proviso to section 16(2) of CGST Act, which requires that value of goods and tax thereon must be paid within 180 days, otherwise proportionate Input Tax Credit is required to be reversed.

Thus, adding value of free supply items is not in harmony with section 16 of CGST Act at all.

It is well settled that law has to be interpreted as whole and not piece meal, as per rule of Harmonious construction, as discussed below.

Decision in case of construction/works contract services applies here also – The provision of adding value of free supplied material to contractor (service provider) in case of construction services has been held invalid in Bhayana Builders v. CST (2013) 42 GST 76 = 38 taxmann.com 221 (CESTAT LB). This decision has been upheld in CST v. Bhayana Builders P Ltd. (2018) 3 SCC 782 = 66 GST 320 = 91 taxmann.com 109 (SC).

The decision was followed in case of supply of free diesel to transporter – CCE v. Karamjeet Singh & Co. Ltd. (2018) 70 GST 821 = 100 taxmann.com 60 (SC).

The decision was followed in case of mining services in TCL-MMPL Consortium v. Commissioner of Central Excise [2021] 125 taxmann.com 126 (CESTAT).

Supply of diesel free to supplier by recipient – no GST on value of fuel – In Vantage International Management Company v. Commissioner of CGST, Mumbai [2021] 124 taxmann.com 355 (CESTAT), appellant was engaged in providing mining services to ONGC for performing drilling operations on Oil Wells in East and West Costs of India. ONGC was required to supply fuel (diesel) for running of drilling equipments without charge. It was held that value of fuel cannot be added to taxable value both under unamended and amended provisions of section 67 ibid for payment of service tax [principle applies to GST also].

In a contrary view, in Pulluri Mining & Logistics (P.) Ltd., In re [2020] 82 GST 327 = 117 taxmann.com 917 (AAR-AP), the applicant was engaged in carrying out mining work. He received HSD Oil from service recipient for equipments and vehicles used for executing mining contract. It was held that in terms of section 15(2)(b), value of said HSD Oil would form part of value of supply of service by applicant [Really, what is includible is ‘amount’ paid on behalf of supplier. Further, GST is payable only on value of service supplied. In my view, the decision is of doubtful validity].

In another contrary view, in Global Veera Helicorp Ltd. In re (2021) 83 GST 291 = 119 taxmann.com 268 (AAR-Gujarat), as per contract of hiring of aircraft (Non-Scheduled Flights), cost of fuel was responsibility of customer. However, where customer was unable to provide fuel, the company (applicant) was procuring fuel and charging customer on actual basis. It was held that this amount is includible in value of taxable services. This reimbursement does not fall within the definition of ‘pure agent’.

4. Meaning of ‘related person’

Explanation (a) to section 15 of CGST Act states that for the purposes of CGST Act, persons shall be deemed to be “related persons” if –

(a) such persons are officers or directors of one another’s businesses.

(b) such persons are legally recognized partners in business.

(c) such persons are employer and employee

(d) 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

(e) one of them directly or indirectly controls the other

(f) both of them are directly or indirectly controlled by a third person

(g) together they directly or indirectly control a third person; or

(h) they are members of the same family.

Explanation (b) – The term “person” also includes legal persons.

Explanation (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.

This definition has been practically copied from Rule 2(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and Rule 2(2) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007, except that in clause (d), the percentage shareholding has been increased from 5% to 25%.

4.1 Meaning of ‘family’

“Family” means,—
(i) the spouse and children of the person, and
(ii) the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person – section 2(49) of CGST Act.

The definition is very practical and sensible.

Otherwise, broad definition of ‘family’ includes many persons which whom the taxable person has practically no financial transactions or often they are not even on speaking terms.

4.2 Price to related person acceptable if the recipient is eligible for entire ITC

Even if the supply is to related person, if the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services – proviso to rule 28 of CGST and SGST Rules.

This is a very sensible provision as when the recipient can take entire input tax credit, there cannot be any intention to evade tax.

Really, this provision should apply to all transactions, as in such cases, there can be no intention to evade tax.

5. Rate of exchange of currency for determination of value

Rate of exchange for value of taxable goods – The rate of exchange for determination of value of taxable goods shall be the applicable rate of exchange notified in CBE&C under section 14 of CGST Act as on date of supply of such goods in terms of section 12 of CGST and SGST Act – rule 34(1) of CGST Rules, 2017 (amended w.e.f. 27-7-2017).

Rate of exchange for value of taxable services – The rate of exchange for determination of value of taxable services shall be the applicable rate of exchange as per Generally Accepted Accounting principles (GAAP) on the date of time of supply of such service, in terms of section 13 of CGST Act – rule 34(2) of CGST Rules, 2017 (amended w.e.f. 27-7-2017).

This provision has been made, since, as per section 129(1) of the Companies Act, 2013. Financial Statements of companies must comply with Accounting Standards, and shall be in prescribed form.

Thus, it will be easy to reconcile value of service tax as per books of account and as per service tax returns.

6. Determination of value when value not ascertainable

The value of the supply of goods or services or both which cannot be valued under section 15(1) of CGST and SGST Act, shall be determined as per rules – section 15(4) of CGST Act.

Such valuation may be required in following situations—

(i)  the consideration, whether paid or payable, is not money, wholly or partly.

(ii)  the supplier and the recipient of the supply are related.

6.1 Value of supply of goods or services where the consideration is not wholly in money

Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall be as follows – Rule 27 of CGST and SGST Rules, 2017.

(a)  the open market value of such supply,

(b)  if open market value is not available, the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply,

(c)  if the value of supply is not determinable under clause (a) or clause (b), the value of supply of goods or services or both of like kind and quality,

(d)  if value is not determinable under clause (a) or clause (b) or clause (c), the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by rule 30 or 31 of CGST and SGST Rules, 2017, in that order.

Invoice should declare some value not Nil value, if valuation under rule 28 – As per proviso to rule 28 of CGST and SGST Rules, where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services.

However, if value declared is Nil, input tax credit will not be available – Assistant Commissioner, CGST & CX, In re [2018] 69 GST 783 = 97 taxmann.com 636 (AAAR-West Bengal) [In fact, if no value is declared, rule 27 of CGST Rules will apply and GST will be payable on open market value].

6.2 Meaning of “open market value”

“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 – Explanation (a) of Rule 35 of CGST and SGST Rules, 2017.

“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 – Explanation (b) of Rule 3 of CGST and SGST Rules, 2017.

Dive Deeper:
Valuation of Supply under GST
GST Valuation and its Practical Issues
Valuation Under the Customs Act