Self-assessment mechanism has been a part and parcel of the Taxation Laws. Under the GST Laws as well the mechanism of self-assessment continues to exist. The determination of GST liability is dependent on two variables namely the “rate of tax” and the “value of supply”. As far as the rate of tax is concerned, the same is determined on the basis “rate notifications” issued by the CBIC on the recommendations of the GST council.
The value of supply of goods/services or both will have to be determined on the basis of the quantified amount of value addition. Ultimately GST being a value added tax, it would be important to determine the value that is created or added to a product up to the point it reaches the consumer. The value of the consumer product would include the cost and the profit margins earned, be it in case of goods or services. Although the tax payer is able to determine the value by himself under the self-assessment mechanism, still the provisions of the CGST Act 2017, categorically lays down provisions in respect of valuation. This is done so in order to ensure that the value determination criteria and basis of value determination is consistently followed by tax payers irrespective of the type of business. In addition to the provisions laid down in the CGST Act 2017, there are “GST Valuation Rules 2017”, which are used to determine the value in case where there are special circumstances as envisaged under the law (transactions for consideration not wholly in money, transactions with related or distinct persons etc). Also the rules provide for alternate valuation mechanism for specified suppliers of goods or services (second hand dealer in goods, air travel agents, money exchange service providers etc).
As per the provisions of Section 15(1) of the CGST Act 2017,
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.
Transaction value in simple words means the offered contract price (net of taxes). In every transaction of supply of goods or services, where the specific conditions that the “buyer and seller are not related persons” and “price is the sole consideration” are fulfilled, there is a basic presumption of law that the transaction would be at a “arms-length price”. That is to say that in such a case, the law assumes that the value declared by the supplier is an appropriate value at law. That is to say, in such cases prima facie the law assumes the transaction free from any valuation issues (undervaluation). However, even if the transaction valuation is accepted, that does not preclude the tax authorities from any scrutiny or enquiries or audits under the GST Laws.
Inclusions in transaction value as per Section 15(2):
As per the provisions of Section 15(1), transaction value means the price actually paid or payable by the recipient to the supplier. However there are statutory inclusions laid down under law, if the same exist in supply of goods or services.
(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
Eg: The Municipal Corporation of “Mahabaleshwar” collects an amount of “entry fees” for the vehicles and number of persons who visit “Mahabaleshwar”. The objective is to collect fund to upkeep of the hill station. Mr Anil of Pune has supplied 500 chairs to Mr Vikram of Mahabaleshwar, for a selling price of Rs 100 per chair. The freight charged is Rs 5000. Thus an Invoice of Rs 55,000 + GST @ 12% is sent along with the chairs. However Mr Anil was required to pay Rs 2000 as entry tax while entering Mahabaleshwar. Mr Anil asks Mr Vikram to reimburse the same in addition to the Invoice value. In such case, the amount of Rs 2000 cannot be separately recovered, but will have to be added as a part of transaction value. As per provisions of Section 15(2), the value will include any amount which is in nature of tax,cess,fees, under any law other than GST Laws. Thus in this case the amount of Rs 2000 will form the part of taxable value and thus the value for the purpose of GST will be Rs (55,000 + 2,000) ie Rs 57,000.
(b) 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;
Eg: Mr Ashwin, manufacturer of “Locks” has agreed to supply “Locks” to Mr Lele for a agreed price of Rs 500 (net of taxes) per lock. The order given is for 100 pcs. However, as a part of the contract, Mr Lele has agreed to provide the mould for the lock (having a cost of Rs 7500) free of cost to Mr Ashwin. In this case, the obligation of Mr Ashwin to spend on the cost of mould , however the same is being borne by the recipient Mr Lele. Thus in this case the cost of the mould, should be apportioned on the price of mould charged, for the purpose of GST valuation. Therefore the taxable value per lock, as per Section 15(2) will be Rs 500 as agreed + apportioned value per piece Rs 75 (7500/100 pieces), ie Rs 575.
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and 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 goods or supply of services;
Eg: Mr Shubham, on the occasion of his wedding, decides to procure 350 crockery sets as a return gifted. Pushkar Enterprises the owner of the crockery store offers to sell each set for Rs 700. The set is usually packed in a thick insulated packing and has a box as its secondary packing. For this special order Pushkar Enterprises has committed to give an additional decorative packing having a cost of Rs 25 per set. This cost was to be additionally recovered from Mr Shubham. In such case, as per the provisions of Section 15(2), the incidental expenditure of Rs 25 per set is incurred in connection with the supply of crockery set. Thus the same will be additionally recovered over and above the agreed price of Rs 700 per set. Therefore, the taxable value in the given case will be (Rs 700 + Rs 25) ie Rs 725 per crockery set.
(d) interest or late fee or penalty for delayed payment of any consideration for any supply;
Generally under a contract of supply of goods or services, amount in respect of interest, fees or delayed payments generally exists where there are credit terms in respect of the payments to be received.
Eg: Mr Manish has supplied a consignment of Tables to Mr Mit. The value of supply is Rs 1,50,000 + GST @ 18%. As per the contract, the terms of payments are 1 months credit period. However if the payment is not made within 1 month, late fees @ Rs 100 per day would be applicable. The actual supply was made on 09/04/2019. The payment however was received on 25/05/2019. Thus there was a delay of 15 days leading to a late fees of Rs (15*100 ie 1500). As per the provisions of valuation under GST, the late fees which would be receovered from Mr Mit, will be liable for GST. However practically, it cannot be known if the late fees/interest or delayed payment charges are applicable or not, and if yes how much it would applicable, at the time of making supply. In such case, for the actual value of supply ie Rs 1,50,000, the GST would be payable along with returns for the month of April 2019 (20th May 2019). As far as the additional amount recovered is concerned, the same shall be recovered by issuing a debit note as mentioned u/s 34 of the CGST Act 2017, in the month of May, along with GST thereon @ 18%. The GST liability on the additional amount, collected by issuing debit note will be recovered along with the tax liability for the month of May 2019 (20th June 2019).
(e) Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments. Explanation.––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.
Eg: X Ltd is engaged in supply of ethane gas. It has received a subsidy for research from the Central Government having an apportion-able amount of Rs 100 per cylinder. However the same will not form the part of value of supply. Thus, any subsidy received from Central or State Government will not be included in the taxable value of the supplier, however if received from any person other than central or state government, the same shall be forming part of taxable value.
Exclusions in transaction value as per Section 15(3):
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
Any discount by whatever name called be it trade discount, cash discount, as long as the same is duly recorded on the face of invoice and actually been passed on is eligible to be deducted from the taxable value of supply of goods or services. In this case, it would be pertinent to note that such deduction towards the discount is eligible only in cases where the discount is passed before or at the time of making supply.
(b) after the supply has been effected, if— (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 on the basis of document issued by the supplier has been reversed by the recipient of the supply.
Eg: Mr Manish has supplied a consignment of Tables to Mr Mit. The value of supply is Rs 1,50,000 + GST @ 18%. As per the contract, the terms of payments are 1 months credit period. However if the payment is made within 15 days a discount of Rs 2000 would be eligible. The actual supply was made on 09/04/2019. The payment however was received on 15/04/2019. Thus the payment was received duly within 15 days, leading to eligibility of discount of Rs 2000. As per the provisions of valuation under GST, the discount allowable to Mr Mit, will be eligible for reduction of taxable value and also leading to reduction in GST levied. However practically, it cannot be known if the eligibility of discount exists or not, at the time of making supply. In such case, for the actual value of supply ie Rs 1,50,000, the GST would be payable along with returns for the month of April 2019 (20th May 2019). As far as the discount allowed is concerned, the same shall be passed on by issuing a credit note as mentioned u/s 34 of the CGST Act 2017, in the month of May, along with GST thereon @ 18%. The GST liability on the discount amount allowed by issuing credit note will be eligible for reduction from the tax liability for the month of May 2019 for Mr Manish. Likewise, Mr Mit will be liable to reduce his Input tax credit to the extent of GST on amount of Rs 2000, for which he is in receipt of credit note.
It would be crucial to note that the reduction in value after supply is eligible, only if the reduction in value was pre agreed prior to making of supply of goods or services.
In the above write up, we have deeply analyzed the provisions of Valuation under GST Laws. In respect of valuation rules, we shall discuss the same under the specific discussion on CGST Rules, whereby we shall be covering in depth regarding the Valuation rules, it applicability and utilization under GST regime.
CA Aumkar Gadgil
Disclaimer:The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above