• Valuations under the GST law refers to ‘value of taxable supply’

• Determination of Value of taxable supply is of utmost importance for determining the ‘value’ of the goods on which tax has to be calculated and tax liability thereon on each transaction

• Section 15 of the CGST/SGST/IGST Law deals with the Value of Taxable supply

• Section 15 has four sub-sections dealing on different things discussed in later slides

• In cases where determination of value is not possible as per Section 15, one has to refer to “Determination of the Value of Supply of Goods and Services Rules, 2016”

• Determination of the Value of Supply of Goods and Services Rules, 2016 consist of Rules 2 to 8 which will be discussed in details in later slides

VALUE OF TAXABLE SUPPLY

Sec. 15 (1)  – Value of a supply of goods and/or services shall be:

“Transaction Value (TV), that is the price actually paid or payable for the said supply of goods and/or services”

Where:

• The supplier and the recipient of the supply are not related
• The price is the sole consideration for the supply

GST VALUATION (DETERMINATION OF VALUE OF SUPPLY OF GOODS AND SERVICES) RULES, 2016

In case determination of value of taxable supply is not possible as per section 15 of GST Laws, the following rules have been prescribed for the same.

• Rule 2 – Definitions
• Rule 3 – General Rule and Methods of Determination
• Rule 4- Determination of value of supply by comparison
• Rule 5- Computed Value Method
• Rule 6- Residual Method
• Rule 7 – Rejection of Declared Value
• Rule 8 – Valuation in certain cases like pure agents and money changers

Rule 2 – Definitions

“(a) “Act” means the IGST Act or the CGST Act or, as the case may be, the SGST Act;

(b) “goods of like kind and quality” means goods which are identical or similar in physical characteristics, quality and reputation as the goods being valued, and perform the same functions or are commercially interchangeable with the goods being valued and supplied by the same person or by a different person;

(c) “services of like kind and quality” means services which are identical or similar in nature, quality and reputation as the services being valued and supplied by the same person or by a different person; and

(d) “transaction value” means the value of goods and/or services within the meaning of section 15 of the IGST / CGST / SGST Act.”

Rule 2 – Definitions

• Rule 2 defines “goods of like kind and quality”, which was also there under the Excise and customs valuation rules.
• The new thing however is “Services of like kind and quality”. Services did not have comparable valuation in the past as its very difficult to ascertain servies of like kind and quality. As quality and cost of service are always different for different service provider. This may open a pandora box for litigation.
• The Rules do not include any special valuation mechanisms, such as composition schemes for hotels and restaurants and insurance services.
• No specific valuation provisions have been prescribed in respect of transactions in the nature of barter/exchange which are treated as taxable supplies.

Rule 3 – Methods of determination of Value

“(1) Subject to rule 7, the value of goods and/or services shall be the transaction value

(2) The “transaction value” shall be the value determined in monetary terms

(3) Where the supply consists of both taxable and non-taxable supply, the taxable supply shall be deemed to be for such part of the monetary consideration as is attributable thereto.

(4) The transaction value shall be accepted even where the supplier and recipient of supply are related, provided that the relationship has not influenced the price.

Rule 3 – Methods of determination of Value

(5) Where goods are transferred from—

(a) one place of business to another place of the same business,

(b) the principal to an agent or from an agent to the principal, whether or not

situated in the same State, the value of such supply shall be the transaction

value.

(6) The value of supplies specified in sub-section (4) of section 15 of the Act shall be determined by proceeding sequentially through rules 4 to 6.”

Explanation:-

Rule 3 is general rule, which again refers back things to transaction value as described in section 15. For internal supplies, transfer to agents, transfer to related parties, if TV is known, TV shall be the taxable value.

Rule 4 -Determination of value of supply by comparison

Explanation:-

As stated earlier, these rules are similar to Customs Valuation Rules with respect to the goods involved. However, for services this is a new concept and finding services of like kind and quality for comparison should be a cumbersome task.

Also, the price of goods/services may be different for different city/towns and cause a threat of revenue and assesses taking a different view on valuations and then litigating the matter further up.

This leaves the valuation at the discretion of the concerned officer.

Rule 5 – Computed Value Method

Rule 3 was to be applied in case valuation was not possible as per section 15, then rule 4 was to be applied in case valuation was not possible even after applying rule 3. Similarly, Rule 5 has to be applied if valuation could not happen after applying Rule 4 too. The extract of the rule is as follows:

“Computed value method— If the value cannot be determined under Rule 4, it

shall be based on a computed value which shall include the following:-

(a) the cost of production, manufacture or processing of the goods or, the cost of provision of the services;

(b) charges, if any, for the design or brand;

(c) an amount towards profit and general expenses equal to that usually reflected in the supply of goods and/or services of the same class or kind”

Rule 5 – Computed Value Method

Explanation:-

• If comparable are not readily available, computation shall be required as per Rule 5
• Computation shall be on basis of cost plus charges, if any, for design and brand plus general expense plus profit
• However, the profits and general expenses have not been defined, but have been left open ended for comparing it with Companies indulged in supply of goods and or services of same class and kind
• Taking comparable profits of similar class/kind of manufacturer/supplier of goods/services again is a cumbersome task and open ended for litigations

Rule 6 – Residual Method

“Where the value of the goods and/or services cannot be determined under the provisions of rule 5, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules.”

Explanation:-

This is a general residual rule, to be used as a last resort. This is again open ended and refers to principles and general provisions as per law and other rules.

Rule 7 – Rejection of declared Value

“(1)(a) When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any goods and/or services, he may ask the supplier to furnish further information, including documents or other evidence and if, after receiving such further information, or in the absence of any response from such supplier, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, it shall be deemed that the transaction value of such goods and/or services cannot be determined under the provisions of sub-rule (1) of rule 3.

(b) The reasons to doubt the truth or accuracy of the value of the supply declared by the supplier shall include, but not be limited to the following:

(i) the significantly higher value at which goods and/or services of like kind or quality supplied at or about the same time in comparable quantities in a comparable commercial transaction were assessed;

(ii) the significantly lower or higher value of the supply of goods and/or services compared to the market value of goods and/or services of like kind and quality at the time of supply; or

(iii) any mis-declaration of goods and/or services in parameters such description, quality, quantity, year of manufacture or production.”

Rule 7 – Rejection of declared Value

“(2) The proper officer shall intimate the supplier in writing the grounds for doubting the truth or accuracy of the value declared in relation to the supply of goods and/or services by such supplier and provide a reasonable opportunity of being heard, before taking a final decision under sub-rule (1).

(3) If after hearing the supplier as aforesaid, the proper officer is, for reasons to be recorded in writing, not satisfied with the value declared, he shall proceed to determine the value in accordance with the provisions of rule 4 or rule 5 or rule 6, proceeding sequentially.

Explanation: For removal of doubts, it is hereby declared that this rule by itself does not provide a method for determination of value. It provides a mechanism and procedure for rejection of declared value in cases where there is reasonable doubt that the declared value does not represent the transaction value.”

Rule 7 – Rejection of declared Value

Explanation: For removal of doubts, it has been declared that this rule by itself does not provide a method for determination of value. It provides a mechanism and procedure for rejection of declared value in cases where there is reasonable doubt that the declared value does not represent the transaction value.

However, the word “doubt” is in itself a very vague word. In spite, of the rule necessitating writing down and communicating the reasons to doubt to the dealer, obtaining his explanation and again writing down the reasons for rejection of such reasons, this provision may attract un-wanted attention from the officers, who would want to reject the declared value based upon vague doubts.

This provision is good for plucking revenue leakage, however, how this is implemented and interpreted by the department and its officers will be the key towards ease of doing business and convenience for the dealers.

Rule 8 – Valuation in Certain Cases – Pure Agents

“(1) Pure Agent

(a) Notwithstanding anything contained in these rules, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods and/or services procured;

(ii) the recipient of service receives and uses the goods and/or services so procured by the service provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) the recipient of service knows that the goods and/or services for which payment has been made by the service provider shall be provided by the third party;

(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

Rule 8 – Valuation in Certain Cases – Pure Agents

“(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) the goods and/or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Explanation: For the purposes of this sub-rule, “pure agent” means a person who–

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) neither intends to hold nor holds any title to the goods and/or services so procured or provided as pure agent of the recipient of service;

(c) does not use such goods and/or services so procured; and

(d) receives only the actual amount incurred to procure such goods and/or services”

Rule 8 – Valuation in Certain Cases – Pure Agents

Explanation:

If a person is covered under the definition of pure agent, all re-reimbursable expenses incurred by the pure agent on behalf of the service recipient and billed specifically, shall not attract GST.

A value of Taxable Supply shall only be the value of services provided by the pure agent to the service recipient in a capacity of Pure Agent, however, the pre-condition is that all such payments should be separately mentioned in the invoice issued by the service provider to the recipient of such services.

Rule 8 – Valuation in Certain Cases – Money Changer

“The value of taxable service provided for the services in so far as it pertains to purchase or sale of foreign currency, including money changing, shall be determined by the service provider in the following manner:-

For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time, multiplied by the total units of currency:

Provided that in case where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money:

Provided further that in case where neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI.”

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