GST Blog

GST - Valuation of supply

By J.Prem Bashani, founder @psquarewisdoms

Valuation is the measure of the goods and services supplied during the course of trade for the purpose of computing taxes. Under GST regime, goods and services are levied @ advalorem rates of taxes. Meaning, a percentage of the value of the goods and services is levied as taxes. Therefore, the burden of determining the value of the goods and services supplied, assumes significance. That makes valuation the second important area of disagreement between the trade and the department, after classification, in the determination and assessment of the tax dues.

GST laws seek to adopt the most rational method of valuation of goods and services that is followed worldwide. They seek to accept the actual transaction value as the value of goods and services for the purpose of calculating taxes. ‘The transaction value’ is the actual price agreed to be paid or payable for the goods and services supplied, when the parties are not related and price is the sole consideration to the transactions. Contentious price elements of the past that were a recipe of litigations are specifically sought to be included in the value under the present GST laws. They are, amount of taxes paid other than under GST laws, amount liable on the supplier under the contract but expended by the recipient, incidental expenses like commission or packaging or any expenses on or before but connected to the supply and charged on the recipients, interest/late fee/penalty or deferred payment of any consideration charged on the recipients and subsidies directly linked to the price excluding subsidies provided by the central government and state governments.

Accordingly, refundable deposits paid to the supplier and genuine discounts allowed to the recipient at the time of actual transaction are allowable exclusions for arriving at the value. Also, post supply costs incurred for secondary packing and freight for delivery are not includible in the assessable value if they are not charged to the recipients. Discounts extended post supply, but expressly agreed in connection to the transaction invoice before supply, is also excludible from the assessable value provided the input tax credit attributable to the discount amount is reversed by the recipient of the supply.

A contract price between the supplier and recipient is normally accepted as the ‘transaction value’ and the same taken as the basis for computing tax. But when factors like relationship of parties or in cases of deemed supply where consideration is not money, but a price is implicit, the transaction value will become questionable under the GST laws. But, however, when the relationships of parties do not influence the price, it is provided to accept the contract value as assessable value for the purposes of computing taxes. So to administer the valuation disputes, in such cases where consideration to the transactions is not in money terms or where the parties to the transactions are related or when supply is made by any specified category of supplier or when the transaction value declared is not reliable in terms of some specified parameters, the department reserves the power to reject the transaction value declared by the suppliers and proceed to determine the value in terms of the valuation rules.

The indicative reasons to reject the transaction value declared that are provided under the GST laws are (i) when comparable supplies are at significantly higher value; (ii) when the transaction is at significantly lower or higher than market value of supplies; and (iii) mis-declaration in parameters like description, quantity, quality, year of make etc. In the cases of disputes in accepting the transaction value declared for the purposes of assessment of taxes, three methods are prescribed under GST Valuation Rules for determining the transaction value viz., comparative method, computation method and residual method, which are required to be followed sequentially in the said order. Besides, some specific valuation methods have been specified like in case of pure agents and money changers. Further specific rules are framed in case of Insurer, Air travel Agent and distributor or selling agents of lottery.

As a remedial measure, whenever transaction value is disputed, the GST laws provide that the taxable value is arrived at after including the following elements to the transaction value declared viz. (i) Any amounts paid by recipient that are obligation of supplier to pay; (ii) that money value of goods or services provided, in connection to the supply, free of cost or at concession by recipient; (iii) Royalties and license fees payable by recipient as a condition of supply; (iv) Taxes levied under any other law(s) (other than SGST / CGST or IGST); (v) Expenses incurred by supplier before supply and charged separately from the recipient; (vi) Subsidy realized by supplier on the supply; (vii) Reimbursements claimed separately by the supplier; (viii) Discounts allowed ‘after’ supply except when known before supply.

In essence, the valuation under GST laws provide for computing taxes on the actual transaction value of the supply of goods and services with prescribed checks to prevent circumventing the intrinsic value of the supply. Therefore, adopting transparent pricing policy, and diligently constructing/defining the contract of supply and sale between the transacting parties is fundamental to avoiding valuation disputes and a hassle free tax experience.


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