Value of Supply of Goods or Services under GST

Value of Supply under GST refers to the amount on which GST is calculated and paid. According to Section 15 of the Central Goods and Services Tax (CGST) Act, 2017, the value of a supply of goods or services or both is the transaction value, which is the price actually paid or payable for the said supply, provided that the supplier and the recipient are not related and the price is the sole consideration for the supply. In addition to the transaction value, certain elements are mandatorily included in the value of supply as specified in Section 15(2).

Table of Contents

1. Introduction
2. Methods of Calculation of Value of Taxable Supply (An Overview)
3. Value of Taxable Supply [Section 15(1)]
4. Determination of Value of Taxable Supply Where Section 15(1) is Not Applicable [Section 15(4)]

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1. Introduction

In any fiscal statute, the determination of tax may be based on value of item or on some other basis (like quantity, length, number, square meter, etc.). When tax is determined as a percentage of value (expressed in monetary terms), it is called as ad valorem basis. Under GST laws, the tax is levied as a percentage of the value of supply, whether of goods or of services. In other words, GST is payable on ad valorem basis. Therefore, it becomes important to know the mechanism for determining the value of a supply on which tax is to be paid. This chapter describes the statutory provisions, related rules and their analysis, which are given in CGST Act and CGST Rules.

2. Methods of Calculation of Value of Taxable Supply (An Overview)

The section 9 of CGST Act, 2017 gives the basis of charge. As per this section, the GST shall be levied on the basis of taxable Supply of goods, services determined under section 15. The section 15 contains the provisions of “Value of Taxable Supply”. The following is the overview of these provisions.

Section 15(1)	Transaction Value is the value of Supply
Section 15(2)	Inclusions in the Value of Supply
Section 15(3)	Discount not to be included
Section 15(4)	When section 15(1) is not applicable (Rule 27 to Rule 31)
Section 15(5)	About notified Services/Goods (Rule 32)

It may be noted that

The provisions of value of supply under CGST Act have also been made applicable to IGST Act vide section 20 of the IGST Act. In most of the cases of regular normal trade, the invoice value is the taxable value. However, when value cannot be determined under section 15 and for certain specific transactions, the value is determined using CGST Rules, 2017.

CGST Rules at a Glance

The Chapter IV of CGST Rules contains the following in relation with Valuation.

Rule 27	Where consideration is not wholly in money
Rule 28	Supply between distinct or related persons
Rule 29	Supply through an Agent
Rule 30	Value based on Cost
Rule 31	Residual Method

3. Value of Taxable Supply [Section 15(1)]

As per section 15(1) of 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.”

The following are the important inferences –

• There are two basic conditions for application of section 15(1) –

1. 1. Supplier and recipient are not related.
   2. The price is the sole consideration for the supply.

• If these two conditions are met, then

Value of Supply

=

Transaction Value [Price paid or payable]

+

Certain Elements [Given in Section 15(2)]

The price payable refers to price that is agreed to be paid for the goods/services.

Meaning of Relevant Terms

Transaction Value – The transaction value refers to the price which is the price actually paid or payable for the supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. It includes any amount which the supplier is liable to pay but which has been incurred by the recipient of the supply.

Related Persons [Explanation to Section 15] – The persons shall be deemed to be “related persons” The term “related persons” is defined by explanation to section 15. By virtue of this definition, person shall be deemed to be “related person” if–– such persons are officers or directors of one another’s businesses; such persons are legally recognised partners in business; such persons are employer and employee; any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them; one of them directly or indirectly controls the other; both of them are directly or indirectly controlled by a third person; together they directly or indirectly control a third person; or they are members of the same family.

The Clause (b) of the explanation prescribes that person also includes legal persons. As per clause (c), the 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.

Definition of Family [Section 2(49)] –

Family means,—

1. the spouse and children of the person, and
2. the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person.

3.1 Inclusions in Transaction Value [Section 15(2)]

When the value of supply is assessed on the basis of transaction value, the taxable value includes certain elements in addition to price actually paid or payable for the supply. These ingredients are as follows –

1. Any taxes, duties, Cesses, fees and charges except GST.
2. Any payments made to third parties by the recipients on behalf of the supplier in relation to the supply.
3. The incidental expenses, such as, commission and packing, charged by the supplier or anything else done by the supplier in relation to the supply at the time of or before the delivery of goods or supply of services.
4. Interest, late fee and penalty for delayed payment of any consideration for any supply and
5. Any subsidy directly linked to the price excluding subsidies provided by the Government (Central/ State).

Valuation Methodology for ascertainment of GST on TCS under Income-tax Act, 1961

For the purpose of determination of value of supply under GST, tax collected at source (TCS) under section 206C of the Income-tax Act, 1961 is not includible as it is an interim levy not having the character of tax. [Circular No. 76/50/2018 GST, dated 31-12-2018 amended vide corrigendum dated 7-3-2019]

Example 1 – (Treatment of Municipal and other taxes)

The list price of the goods is ` 40,000 (exclusive of taxes). The tax levied by Municipal authority is ` 2,000. The CGST/SGST chargeable on the goods is @ 18%. Now, since the value includes any taxes, duties (other than GST), etc., the Value of Supply shall be ` 42,000 in the given case. Hence, GST payable will be 18% of ` 42,000 i.e. ` 7,560.

Example 2 – (Payment on behalf of supplier)

Chitra Advertisers conceptualized and designed the advertising campaign for a new product launched by HLL for a consideration of ` 8,00,000. Chitra Advertisers had to pay ` 40,000 to Massom Limited. It has also been agreed between the parties that HLL will discharge this ` 40,000 liability of Chitra Advertisers. The price of ` 8,00,000 has been agreed upon after consideration of this additional payment to be made by HLL directly to Massom Limited on behalf of Chitra Limited. As per section 15(2), this direct payment to third party on behalf of supplier by the recipient has to be added to the transaction value. Therefore in this case the value of supply shall be aggregate of ` 8,00,000 and ` 40,000 i.e. ` 8,40,000.

Example 3 – (Treatment of incidental expenses)

Arun of Delhi supplied 50 tons of Chemical to Barun of Kolkata at the rate of ` 4,000 per ton. Besides he charged freight `16,000, packing charges ` 7,000, weighing charges ` 2,500 and inspection charges ` 8,000. As per section 15(2)(iii), the incidental expenses are also included in value of Supply. Therefore, the value of Supply will be calculated as follows:

Example 4 – (Subsidy linked to price)

Chhaya Enterprises has quoted the price of ` 66,000 (exclusive of taxes) for sale of a machine. The Chhaya Enterprises has received a subsidy on sale of such goods from Government at ` 4,000. The

benefit of this subsidy has been passed by the supplier in the above price of ` 66,000. As per section 15(2), this subsidy will not be added in the value of supply as it has been received from the Government. Therefore the value of supply will remain at ` 66,000. If this subsidy had been received from a non-government agency, then such subsidy will be included in the transaction value. The value of supply would then be ` 70,000.

3.2 Exclusion of Discount from Transaction Value

As per section 15(3),

“The value of the supply shall not include any discount which is given –

(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

(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.”

Analysis of Section 15(3)

The analysis of above provision deciphers the following –

• If discount is duly recorded in the invoice either before/ at the time of supply, discount is excluded (means not included in the value of supply).
• If the discount is provided after the supply is effected, then discount may still be
  excluded from the value of supply, if following conditions are fulfilled –

1. 1. Such discount is given under an agreement entered into at (or before) the time of such supply and can be worked out invoice-wise; and
   2. 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.

The provisions relating to discount can be depicted by way of following diagram –

Example 5 – (Discount allowed at the time of supply)

Shubham Enterprises has sold goods with list price ` 5,000 to a customer. A discount of 20% is given to the customer, which is reflected in invoice, to arrive at the final price of ` 4,000. Since the discount is allowed at the time of supply and is shown in the invoice, the taxable value is ` 4,000.

Example 6 – (Discount allowed at the time of supply)

A trader has provided the following information in his invoice dated 12th February 2018 1200 pieces of chairs @ ` 540 per piece ` 6,48,000 Less – Trade Discount @ 15% ` 97,200 Net Price (Taxes to be added) ` 5,50,800 In this case, the value of supply will be ` 5,50,800 as discount is shown in the invoice and has been allowed at the time of supply.

Example 7 – (Discount not known at the time of supply)

Reliance Mega Mart has appointed dealers for promotion and sale of their products. The company has announced turnover discount after review of dealer performance during the year. This discount will be given on cash-back mode. Since, the discounts were not known at the time of delivery of supply of goods, they cannot be shown in the invoices. Therefore, the discount will not be deducted from the taxable value of the goods.

The discount will not be included in the value of taxable Supply if the following two conditions are satisfied –

1. Such discount is given under an agreement entered into at (on or before) the time of such Supply and specifically linked to relevant invoices; and
2. 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.

Example 8 – (Comprehensive problem on Section 15(1)(2) & (3))

India Machine Private Limited, Delhi supplies plastic granulation machine to Shobraj Plastics Ltd., Delhi. It furnishes the following details in respect of such supply: Particulars Amount (`) List price of the machine (exclusive of taxes and discounts) 1,00,000 Corrugated Boxes used for packing the machine (not included in price above) 1,000 Subsidy received from Delhi Government on sale of such machine (considered in price above) 5,000 Discount @ 2% is offered on list price of the machine (recorded in the invoice for the machine) Determine the value of taxable supply made by India Machine Private Limited.

Computation of value of taxable supply Particulars ` List price of the goods (exclusive of taxes and discounts) 1,00,000

Particulars ` Add –   Corrugated Boxes used for packing the machine [Includible in the value as per section 15(2)(c)] 1,000 Add –   Subsidy received from Delhi Government on sale of such machine [Subsidy received from State Government is not included in the value in terms of section 15(2)(e)] – Total 1,01,000 Less –   Discount @ 2% on List Price i.e. ` 1,00,000 [Since discount is known at the time of supply, it is deductible from the value in terms of section 15(3)(a)] (2,000) Value of taxable supply 99,000

4. Determination of Value of Taxable Supply Where Section 15(1) is Not Applicable [Section 15(4)]

The section 15(4) provides that where the value of the supply of goods and/or services cannot be determined as per section 15(1), the same shall be determined in such manner as may be prescribed. It means if the transaction is with a related party and/or price is not the sole consideration for the supply of goods and/or services, then the value will be determined as per valuation principles prescribed in CGST Rules, 2017.

4.1 Valuation Principles in CGST Rules, 2017

As regards the determination of value of supply, the rules are given under Chapter IV of CGST Rules, 2017. The following are the related rules –

Rule 27 – Consideration is not wholly in money

Rule 28 – Supply between distinct or related persons

Rule 29 – Supply through an Agent

Rule 30 – Valuation based on cost

Rule 31 – Residual Method

4.2 Valuation Rule where the consideration is not wholly in money [Rule 27]

When Rule 27 is applicable –

If the consideration for a supply of goods and/or services is wholly or partly in non-monetary terms, the supply is valued in accordance with provisions of rule 27. For example, this rule is applicable in the following cases –

• Barter transaction
• Exchange transaction
• Permanent transfer or disposal of business assets where input tax credit has been availed on such assets

Methodology of Valuation –

The following methods are laid down under Rule 27 –

• The open market value of such supply;
• If open market value of the supply is not known, the consideration in money plus the money equivalent of the non-money consideration, if such amount is known at the time of supply;
• If the value cannot be determined under the previous two clauses, the value of supply of goods and/or services of like kind and quality;
• Finally, if the value is not ascertainable by using above methods, then –

1. 1. FIRST Rule 30 is to be applied (Cost based valuation)
   2. THEN Rule 31 (Best Judgment method) is used, if rule 30 is not feasible.

Sequential Application

The methodology provided in rule 27 are to be used in order of sequence mentioned above. However, in case of supply of services, the supplier has an option to skip rule 30 and directly apply rule 3.

This Rule 27 may be tabulated for more conceptual clarity in the following manner –

Order of Application	Situation	Manner in which Value of supply will be determined
A	When the open market value of supply is available	The open market value Example 9 – (Given in CGST Rules, 2017) Where a new phone is supplied for ` 20,000 along with the exchange of an old phone and if the price of the new phone without exchange is ` 24,000, the open market value of the new phone is ` 24,000
B	If the open market value of supply is not available (i.e. the situation ‘A’ is not applicable)	Consideration in money PLUS Monetary equivalent of non-monetary consideration (Provided such amount is known at the time of supply) Example 10 – Where a laptop is supplied for ` 40,000 along with the barter of a printer that is manufactured by the recipient and the value of the printer known at the time of supply is ` 4,000 but the open market value of the laptop is not known, the value of the supply of the laptop is ` 44,000.
C	When both the above situations are not applicable. (i.e. the situation ‘A’ and ‘B’ are not applicable)	The value of supply of goods and/or services of “like kind and quality” shall be used.
D	When all the above situations are not applicable. (i.e. the situation ‘A’, ‘B’ and ‘C’ all are not applicable)	Consideration in money PLUS Monetary equivalent of non-monetary consideration (As determined by the application of Rule 30 or Rule 31 in that order.)

Meaning of “Open Market Value” as per Explanation (a) to Rule 35

“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 the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

Meaning of “Supply of goods or services or both of like Kind and Quality” as per Explanation (b) to Rule 35

“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 the 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.

Example 11 – (Rule 27)

Kamal Limited is an “Air Conditioners” manufacturers company. It sells a customized centralized AC unit to Mr. Mahesh, a renowned chartered accountant, for ` 3,50,000. In relation to this transaction, Mr. Mahesh provides free consultancy to Kamal Limited for translating accounting system into Ind. AS. Since, AC unit is purely customized as per specification of Mr. Mahesh, its normal value is not available. The similar model of centralized AC unit is not available in any other store. Even, the value of accounting consultancy is also not available. Find the value of supply of AC unit by Kamal Limited as per Rule 27. Now, in this case, the value cannot be determined as per first three methods given in rule 27. Therefore, it will be determined as per the last method of rule 27. The value of supply shall be ` 3,50,000 (being monetary consideration) plus value of non-monetary consideration (as per rule 30/31)

4.3 Value of Supply of Goods or Services or Both Between Distinct or Related Persons, Other than Through an Agent [Rule 28]

The rule 28 is applicable in the following cases –

1. When the supply is between distinct persons or
2. Where the supplier and recipient are related

Note – These cases do not cover supplies made through an agent.

The rule 28 prescribe that in above cases, the value of the supply shall be the open market value of such supply. However, if the open market value is not available, then the value of “like kind and quality” shall be used. If this method fails, then the value is determined by the application of rule 30 or rule 31 in that order.

Further Supply by the Recipient The first proviso to rule 28 provides that 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 90% 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. The second proviso to this rule provides that 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 the goods or services. The following is the tabular presentation of Rule 28. Order of Application Situation Manner in which Value of supply will be determined A When the open market value of supply is available. The open market value is taken as the value of supply of goods and/or services. Deemed Open Market Value – If the recipient is eligible to take full Input Tax credit then the value declared in the invoice shall be deemed to be the open market value of goods or services. B If the open market value of supply is not available. (i.e. the situation ‘A’ is not applicable) The value of supply of goods and/or services of “like kind and quality” shall be used. C When both the above situations are not applicable. (i.e. the situation ‘A’ and ‘B’ are not applicable) The value is determined by the application of rule 30 or rule 31 in that order. Example 12 – [Supply between related persons] X Limited and Y Limited are owned and controlled by Ms. Anjali in a manner that the companies are related person as per explanation to section 15 of CGST Act, 2017. X Limited gets a contract for ` 10 Lakhs which it passes on to Y Limited for ` 8,00,000. Similar services are provided by Y limited to outsiders for ` 9,50,000. The value of supply by Y Limited to X Limited shall be based on the open market price i.e. ` 9,50,000.

Example 13 – (Rule 28)

Atul Limited owns a capital goods manufacturing unit in Mumbai. It supplies a heavy machine to Bimal Limited as a gift and not charged any consideration. The same machine is offered by Atul Limited to others (i.e. unrelated customers) for Rs. 80,000. Determine the value of supply if – Case 1 Atul Limited and Bimal Limited are unrelated parties Case 2 Sumit (HNI) holds 20% equity shares in Atul Limited as well as Bimal Limited. Case 3 Sumit (HNI) holds 40% equity shares in Atul Limited as well as Bimal Limited.