Valuation GOODS AND SERVICE TAX 22-07-17 Mohd. Irshad Ahmed Chartered Accountant Hyderabad

VALUATION Overview There shall be levied a tax called CGST/SGST/IGST on the value determined under Section 15 - Section 9 (1) (levy section) As per Section 15 – The value shall be the transaction value Transaction value is the price actually paid or payable for the said supply of goods or services or both

Valuation continued... Transaction value Price actually paid or payable Supplier and the recipient of the supply are not related Price is the sole consideration

Valuation continued... Related person I. Persons shall be deemed to be “related persons” 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 twenty-five per cent 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; II. 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.

Price is the sole consideration for the supply Valuation continued... Price is the sole consideration for the supply Examples where price may not be a sole consideration Manpower supply contract with a contractor. However, scholarship fees paid to the son of the contractor Technical consultancy contract with a Director. However, rent free accommodation provided to a director Services provided by an architect to the company, however architect provided similar services to another group company at a differential price

incidental expenses including commission and packing Valuation continued... Transaction value INCLUSIONS Any taxes, duties, cesses, fees and charges levied under any law except CGST/SGST/IGST Any amount paid by recipient on behalf of supplier and not included in the price actually paid or payable subsidies directly linked to the price excluding subsidies provided by the CG/SG incidental expenses including commission and packing Interest or late fee or penalty for delayed payment of any consideration

Valuation continued... Transaction value EXCLUSIONS Any discount which is given before or at the time of supply if such discount has been duly recorded in the invoice Any discount which is given after the supply, if such discount is as per the terms of agreement and input tax credit has been reversed

Valuation continued... Example A develops a software for B. The total cost of developing the software is Rs. 37 lakhs. A paid profession tax on employee amounting to Rs. 1,20,000. B, deputes an employee for technical support and pays him Rs. 2,50,000 which is not included in Rs. 37 lakhs. A, also incurs certain incidental costs for B towards copyrights amounting to Rs. 50,000. SEZ developer provides subsidy linked to the price amounting to Rs. 1,00,000 which has been reduced from price. A, offers a discount of Rs. 75,000 to B before the issue of invoice. Analyse the value under Section 15 of the CGST Act, 2017

Valuation continued... Example As per Section 15, the value of supply shall include: Transaction value - 37,00,000 Any taxes paid - 1,20,000 Amounts paid by recipient - 2,50,000 Any incidental exp - 50,000 SEZ offers subsidy to A - 1,00,000 Less: Discount given before invoice - (75,000) The value for the purpose of Sec 15 will be Rs. 41,45,000

Valuation continued... Example - Discount A sells textile goods to B for a price of Rs. 1,000 and GST paid on such supply is 10% i.e. Rs. 100. Subsequently, A offers discount of 10% i.e. 100 to B. Determine the value under Section 15, assuming such discount is allowed u/s 15 Supplier Value Output liability Value of supply 1,000 100 Less: Discount (100) (10) Net receivable 900 90 Recipient Value ITC Inward supply 1,000 100 Discount 10% (100) (10) Net price 900 90

If the consideration is not wholly in money Valuation continued... If the consideration is not wholly in money Open market value of supply Sum total of consideration in money + further amount in money equivalent to the consideration not in money Value of supply of goods or services or both of like kind and quality 110% of the cost of production/manufacture/acquisition Determined using reasonable means consistent with the principles and general provisions u/s 15 and rules

Valuation continued... DEFINITIONS (a) “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. (b) “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.

Valuation continued... Example Where a new phone is supplied for Rs.20,000 along with the exchange of an old phone and if the price of the new phone without exchange is Rs.24,000, the open market value of the new phone is Rs 24,000 Where a laptop is supplied for Rs.40,000 along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is Rs.4,000 but the open market value of the laptop is not known, the value of the supply of laptop is Rs.44,000.

Valuation continued... Transactions between distinct or related persons other than through an agent Open market value of supply value of supply of goods or services or both of like kind and quality 110% of the cost of production/manufacture/acquisition Determined using reasonable means consistent with the principles and general provisions u/s 15 and rules

Valuation continued... DEFINITIONS Persons shall be deemed to be “related persons” 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 twenty-five per cent 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;

Valuation continued... Example A, a public limited company based in Telangana is engaged in production and manufacture of tiles. A, has branches in Kerala and Orissa. A, supplies consignment valued at Rs. 5,00,000 to it’s branch ‘B’ located in Kerala. Both A & B are distinct persons within the meaning of Section 25. The cost of manufacture of the said items is Rs. 4,90,000. There is no open value and there is no like kind and quality of goods. Analyse the Valuation of supply under Section 15 of the CGST Act, 2017 and the related rules

Valuation continued... Example As per Rule 28 of the valuation rules the value of supply of goods between the distinct persons shall be the open market value or value of like kind and quality of goods, or 110% of cost of manufacture or value within the principles of Section 15. As stated, there is no open value and nor value of like kind and quality of goods. Hence, the valuation shall be in accordance with Rule 30 & 31. i.e. 110% of manufacture or value within the principles of Section 15. The cost of manufacture is Rs. 4,90,000. Hence the 110% of the manufacture will be Rs. 5,39,000. Accordingly, the value of supply of tiles will be Rs. 5,39,000 and not Rs. 5,00,000.

Valuation continued... Example A, a public limited company based in Telangana is engaged in production and manufacture of tiles. A, has branches in Kerala and Orissa. A, supplies consignment valued at Rs. 5,00,000 to it’s branch ‘B’ located in Kerala. Both A & B are distinct persons within the meaning of Section 25. The cost of manufacture of the said items is Rs. 4,90,000. ‘B’ is eligible to take input tax credit There is no open value and there is no like kind and quality of goods. Analyse the Valuation of supply under Section 15 of the CGST Act, 2017 and the related rules

Valuation continued... Example As per Rule 28 of the valuation rules the value of supply of goods between the distinct persons shall be the open market value or value of like kind and quality of goods, or 110% of cost of manufacture or value within the principles of Section 15. Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value. As stated, there is no open value and nor value of like kind and quality of goods. Hence, the valuation can be in accordance with Rule 30 & 31. i.e. 110% of manufacture or value within the principles of Section 15. However, since ‘B’ is eligible to take full input tax credit, the value declared in invoice i.e. Rs. 5,00,000 shall be deemed to be the value

Value of supply of goods made or received through agent Valuation continued... Value of supply of goods made or received through agent Open market value of supply At the option of the supplier, be 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 110% of the cost of production/manufacture/acquisition Determined using reasonable means consistent with the principles and general provisions u/s 15 and rules

Valuation continued... Example Where a principal supplies groundnut to his agent and the agent is supplying groundnuts of the like kind and quality in subsequent supplies at a price of Rs.5,000 per quintal on the day of supply. The open market value of such supply is Rs.4,550 per quintal. The value of the supply made by the principal shall be Rs.4,550 per quintal or where he exercises the option the value shall be 90% of the Rs.5,000 i.e. is Rs.4,500 per quintal.

Services in relation to Valuation continued... Determination of value in certain cases Services in relation to Value Level 1 Level 2 Level 3 Purchase or sale of foreign currency Difference between the buying or selling rate and the RBI reference rate multiplied by the total units of currency If RBI reference is not available, the value shall be 1% of the gross amount of INR provided or received If neither of the currencies exchanged is INR the value shall be 1% of the converted value of two currencies into INR at the reference rate or at the option of the supplier of services, the value is deemed to be 1% of the gross amount of the currency exchanged for an amount upto 1 lakh rupees subject to a minimum of Rs. 250 Rs. 1,000 and half of a percent of the gross amount of the currency exchanged for an amount upto 1 lakh rupees and upto Rs. 10 lakhs Rs. 5,500 and one tenth of a percent of the gross amount of the currency exchanged for an amount exceeding Rs. 10 lakhs subject to a maximum of Rs. 60k

Services in relation to Valuation continued... Determination of value in certain cases Services in relation to Value Level 1 Level 2 Booking of tickets for travel by air provided by an air travel agent 5% of basic fare for domestic bookings and 10% of basic fare for international bookings NA Life insurance business except where the entire premium paid is towards risk cover in life insurance Gross premium charged less amount allocated for investment or saving Single premium annuity policies, 10% of the single premium charged from the policy holder In all other cases, 25% of the premium charged in first year and 12.5% premium charged in subsequent years Where taxable supply is provided by a person dealing in buying and selling of second hand goods and no ITC has been availed on purchase of such goods, the value shall be difference between the selling price and the purchase price However, in case goods mortgaged for a loan are repossessed, purchase value for the borrower shall be purchase price reduced by 5% points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossessed.

Services in relation to Valuation continued... Determination of value in certain cases Services in relation to Value Level 1 Level 2 The value of a token, a voucher, or a coupon, or a stamp (other than a postage stamp) which is redeemable against a supply of goods or services or both shall be equal to the money value of goods or services or both redeemable against such token, voucher, coupon or stamp. Life insurance business except where the entire premium paid is towards risk cover in life insurance Gross premium charged less amount allocated for investment or saving Single premium annuity policies, 10% of the single premium charged from the policy holder In all other cases, 25% of the premium charged in first year and 12.5% premium charged in subsequent years Where taxable supply is provided by a person dealing in buying and selling of second hand goods and no ITC has been availed on purchase of such goods, the value shall be difference between the selling price and the purchase price However, in case goods mortgaged for a loan are repossessed, purchase value for the borrower shall be purchase price reduced by 5% points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossessed.

Value of supply of services in case of pure agent PURE AGENT Valuation continued... Value of supply of services in case of pure agent PURE AGENT The expenditure or cost incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied: The supplier acts as a pure agent of the recipient of supply when he makes payment to the third on authorisation by such recipient. The payment made by the pure agent on behalf of the recipient has been separately indicated in the invoice of the pure agent The supplies procured by the pure agent from the third party on behalf of the recipient of supply are in addition to the services he supplies on his own account.

Valuation continued... Example Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies. The fees charged by the Registrar of the companies registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

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