GST

Transactions Treated As Supply under GST Even If Made Without Consideration

The transactions made between related persons and their related activities have been prescribed under Schedule I of the GST Act. Schedule I of the GST Act states that the transactions made between the related persons will be considered as supply even though it is made without any sort of consideration.

This article provides the details of the transactions between the related persons and its other related activities considered as supply under the regime of GST as supply even though it is made without any sort of consideration. The guidelines of GST will be applied in those transactions as well. These transactions are listed in Schedule I of the CGST Act. It is to be noted that these transactions are mainly made between the parties in relation to or between an agent or principal. The parties in such cases make payment of tax and later can claim for the same in the form of the input tax credit.

Transactions between Related Persons

Under the law, transactions between related parties are considered special as the methodologies applied for pricing and the results thereof are challenging. In the case of related persons, the prices of the goods and services are controlled and apart from that sometimes the prices will be changed otherwise if the transaction is made between two unrelated parties.

Here the main question is under GST how can treat a transaction made between related people? In that case, the supply will be taxable and the value of supply will be determined according to the provisions of GST laws. The term “related person” has been defined under section 2(84) of the GST Act.

Who is a related person under GST?

 The following are some of the categories to identify the related persons;

• Director/owner/officer of a business and director any other business
• The business partners are legally recognized
• An employee and employer
• If a person has gained about 25% shares in a company whether it may be directly or indirectly
• The management of the company is in common control
• Both the businesses control the business of another company
• The partners of the businesses belong to the same family as they may be family members

Here, the term Person can be referred to an Individual, Hindu Undivided Family (HUF), Limited Liability Partnership (LLP), Partnership Firm, Co-operative Society, Local Authority, Artificial Juridical Person, Body of Individual (BOI), Association of Persons (AOP), Government, etc. Apart from that the term Person also includes the businesses which are incorporated outside India. Persons who are engaged in another business or are the agent or distributor will also be considered as related.

What is the meaning of taxable supply made between related persons?

The supplies or transfer of goods made between the related persons having consideration shall be considered as supply just like any or sale of goods or services. However, the supply that is made between the related persons without any consideration as prescribed under Schedule I of the Goods and Service Tax Act. According to the provisions of the aforesaid section under the Goods and Service Tax, in case of this type of transaction, the transaction will be considered as supply if the supply happens during the day to day operation of the business. 

Further, in case any business or entity import service from an establishment or related person in a foreign country which is outside India without any consideration but for the future growth of the business, in that case, it will be considered as supply. 

However, there is an exemption in respect of the aforesaid provision which is when an employer gifts and employee something and the value of the gift is less than Rs. 50,000, relief will be provided to the employer. In that, the gift will not be treated as Supply.

Valuation of Supply between Related Persons

The valuation of supply between the related persons can be determined by considering the following aspect: (It is to be noted that the below-mentioned aspects will be considered when the supply is not made through an agent)

The open market value of the supply

The first thing which are to be considered while calculating the value of supply between the related people is the Open market value of supply. The term Open market value can be defined as the value of supply between the business or entities which are not related to each other. When supply is made between the two entities or businesses which are related, in that case, there are chances that the cost or price may get influenced by the personal relationship that they share.

This can be better understood with the help of an example. For example, XYZ Limited sells goods to ABC Limited which is related to each other for Rs. 10,000.  Apart from ABC Limited, XUZ Limited also sells goods worth of RS. 15,000 to QPR limited which is an unrelated entity. In this case, if we analyze the price, we can see that there is a difference of Rs. 5,000 in the selling price of buying entities. 

Thus, it can be clearly seen that the relationship between XYZ Limited and ABC Limited has influenced the pricing structure of ABC Limited due to which the valuation of supply will be considered as Rs. 15,000.

On the basis of the above-mentioned case or example, it can be said that if there is difficulty in determining the open market value, in that case, the value of goods will be considered in terms of its quality or in kind.

Let’s analyze the above-mentioned example once again.

If XYZ Ltd wants to make the entire sale of goods to ABC Ltd, in that case, the above-mentioned process of valuation of supply will be considered as appropriate. In that case, the other company GHI Limited which is also engaged in the sale of the same or similar products as that of XYZ Limited at Rs 12,000. Thus, the valuation of supply, in that case, will be Rs. 12,000. It is to be noted that if both of the aforesaid methods do not provide appropriate value then the value will be calculated under the residual method.

Supply of Goods through Agent

The second thing which has to be considered while calculating the value of supply between the related people is that if the goods are being supplied through an agent. In that case, the following two aspects have to be analyzed:

• If the goods are being supplied by the principal to the agent and on behalf of the principal the agent will supply the goods. This can be better understood with the help of an example. For example, a Delhi based company employs an agent in Mumbai and goods are being sent to him. In that case, GST will be applicable.
• If the goods are being received by an agent on behalf of the principal. This can be better understood with the help of an example. For example, a Delhi based company employs an agent in the same city. The agent purchases the goods from Delhi and sends the same to the principal company for sale in Delhi.

It is to be noted any supply that is made between the principal and agent is subject to GST. In simple words, the principal and agent both will have to pay GST whether it may be separately or jointly. However, the person who is paying excess GST can claim for Input Tax Credit later. The value of supply for an agent is completely based on the above-mentioned guidelines in case of related persons.

Taxable Person Importing Services from a Related Person

The import of services by a person who is liable to a tax from a related person or from any of the related person’s entities outside India for the purpose of the business will be considered as supply. This can be better understood with the help of an example. For example, XYZ Inc. is a foreign company incorporated in the United States of America which also has a company incorporated in India under the name ABC Ltd. 

The services are being imported from ABC Ltd. from XYZ Inc. without any kind of consideration, in that case, the import will be treated as supply and GST will be applicable and paid by ABC Ltd on the basis of reverse charge.

Permanent Transfer of Business Assets where Input Tax Credit has been Availed on Such Assets

The Input Tax Credit that has been availed from the permanent sale or transfer of assets will also be considered as supply even though it has been made without any consideration. In that case, GST will be applicable as a result of the sale of assets of the business. However, this rule is not applicable in case the sale of personal assets such as personal land, building, etc.

Here, the term “Permanent transfer” refers to the transfer which is made with an intention to never receive the goods back. It is to be noted that the goods which are sent for the purpose of job work, testing, certification will not be treated as supply as this cannot be considered a permanent transfer.

However, business assets donation, disposal, scrapping in any other manner or form with consideration of sale will be treated as supply as in that case Input Tax Credit can be claimed.

Conclusion

From the above information provided and analyzed, it can be concluded that the valuation of supply is very much influenced by a related person. Thus, it is necessary to differentiate the value of supply between the related persons according to the provisions as prescribed under the Goods and Services Tax Act for proper valuation of supply so that the applicable GST can be computed accordingly. 

For more information, related to the GST registration process and concept of Mixed and Composite Supply you can contact the team of Enterslice. Enterslice has a team of experts who will help you to get your GST registration in a hassle-free manner.

Also, Read

• Where and who should apply for GST Registration in India
• GST REG-06 (Registration Certificate) & How to Download It
• How to Change GST Registration Details of a Business?