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Supply Definition: As per the Act, Supply means all forms of supply of goods or services, e.g., sale, transfer, barter exchange, lease, disposal made or agreed to be made for a consideration by a person in the course of furtherance of business
In the dynamic world of commerce, where every supply holds a story of value, there exists a concept that helps in deriving or arriving at “What shall be the Value of Supply?”
For example – The compass guiding our journey through the World of Indirect Taxation, Section 15 of The Central Goods and Services Act, 2017, when read along with Rules 27, 28, 29, 30, and 31 of The Central Goods and Services Rules, 2017 explains the fundamental concept on how to determine the value of supply of goods or service.
In simple terms, GST is payable on a percentage basis on the value of supply. Therefore, to compute the value of supply, we need to understand the mysteries of Section 15 and explore its implications in everyday language.
The value of supply forms the basis for calculating the GST liability on goods and services in the case of different types of transactions. According to Section 15 of the CGST Act, 2017, the value of supply includes all the costs, expenses, and monetary considerations associated with the supply of goods or services.
The value of supply of goods or service or both shall be the Transaction Value.
It refers to the actual price paid or payable for the goods or services where the supplier and recipient are unrelated and the price is the sole consideration for supply. It forms the basis for most transactions, reflecting the actual market dynamics. Generally, in the case of regular trade transactions, invoice value will be considered as taxable value.
Example: If you buy a Washing Machine for ₹20,000, and there are no additional considerations, discounts, or related-party transactions, the transaction value is ₹20,000.
Any payment made by the recipient on behalf of the supplier in relation to supply will be added to the value of supply when the following conditions are satisfied:
a. Supplier is under contractual liability to make payment to third person
b. The payment is made in relation to such supply
c. It is not included in the price actually paid or payable
Example: Installation and testing expenses are to be paid by the supplier (as per contract) with respect to the installation of machinery at the recipient’s site. It will also be added to value of supply if the recipient pays such charges at the time of installation.
In case of a particular supply of goods or services or both, where the supplier pays some expenses which have to be incurred by the, and these expenses are paid by the supplier to the third party himself but not included in the price, such consideration shall be treated as part of the value of supply.
Discounts like trade discounts, quantity discounts, etc., are a part of regular trade and commerce; therefore, pre-supply discounts, i.e., discounts recorded in the invoice, have been allowed to be excluded while determining the taxable value.
Post-Supply Discounts: Discounts can be excluded from the value after the supply is made if the following two conditions are satisfied:
If any of the conditions are not satisfied, then the exclusion of discount from the value of supply is not allowed.
Example: If Moon Enterprises (ME) didn’t have a prior agreement for a 2% discount but offered it to Star Corp (SC) after negotiation during payment, the discount won’t be deducted from the total value.
SE will provide a commercial credit note of ₹1,000. SC won’t adjust any input tax credit, and ME can’t reduce its GST of February month. Thus, SC’s payment to ME on 10th February would be ₹58,000 (₹50,000 + ₹9,000-₹1,000).
There are instances where the transaction value cannot be determined for various reasons. In such cases, the law provides alternative methods, prescribed in Rules 27, 28, 29, 30, and 31 of the Central Goods and Service Tax, 2017, for computing the value of supply. This includes the open market value, the value of like-kind and quality, and the cost-plus method.
It’s important to note that the transaction value is not always the sole determinant of the Value of Supply. This flexibility allows for a fair representation, especially in cases where the transaction value might not truly reflect the market value.
Rule 27: Value of supply of goods or services where the consideration is not wholly (solely) in money. The value should be determined following the below-mentioned sequentially:
Open Market Value: The Open Market Value (OMV) refers to the value of a supply of goods or services as determined by the open market, where the buyer and the seller are unrelated and the price is the sole consideration. It is one of the methods used to calculate the Value of Supply, especially when the transaction value is unavailable or unreliable.
Example: Suppose a retailer sells a smartphone to an unrelated customer. The retailer bought the phone from the supplier for ₹15,000. After considering various expenses such as transportation and storage, the retailer expects to sell it in the open market for ₹20,000.
Fair value: If the OMV at the time of supply is not ascertainable, then the consideration in money plus the monetary value is equivalent to the consideration not in money (non-monetary consideration).
When any other supply is made under similar circumstances or closely resembles the supply being valued with respect to characteristics, quality, or quantity
Example: Where a new phone is supplied for Rs.20000/- along with the exchange of an old phone, and if the price of the new phone without exchange is Rs.24000/-, the open market value of the new phone is Rs.24000/-.
If any of the above is not available to them, it shall be determined in accordance with the following:
Rule 30: Cost-based valuation: Based on the cost of supply plus a 10% mark-up
Rule 31: Best Judgement Method: By other reasonable means in that sequence
Rule 28: Value of supply of goods or services or both between distinct or related persons, other than through an agent (i.e., when a supply is made between distinct persons)
A person who is under the influence of another person is called a related person; like members of the same family or subsidiaries of a group company, etc. The term “person” also includes legal persons.
However, where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. Further, if the recipient is eligible for a full input tax credit, the invoice value is deemed as open market value and is accepted as taxable value.
Rule 29: Value of Supply of goods made or received through an agent
(Note: The rule is only applicable to determination of the value of supply of goods between Principle and Agent)
Value of supply of services in case of a Pure Agent (Rule 29 of CGST Rules):
Subject to the fulfillment of certain conditions, the expenditure and costs incurred by the supplier as a pure agent of the recipient of the supply of service have to be excluded from the value of supply.
There are nine specific supplies, and the determination of the value of the supply differs with each case.
In essence, Section 15 of The Central Goods and Services Act, 2017, read along with rules, provides a systematic framework for determining the Value of Supply, forming the basis for GST calculation. By understanding the components, inclusions, exclusions, and exceptional cases, businesses and consumers alike can pilot the complexities of GST with greater clarity.
As we engage in various economic transactions, from buying our favorite gadgets to availing professional services, the Value of Supply becomes a crucial factor influencing the overall cost. Embracing this understanding, IGST empowers us to make informed financial decisions and ensures compliance with the GST regulations that underpin our modern taxation system.
Refer to Value of Supply under GST to increase your knowledge on Value of Supply.
At Mercurius, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory, TDS matters, and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the Value of Supply under GST Model Laws, kindly contact us.
