Valuation rules under GST: An Overview

Sonal Pruthi

16 Jan, 2021

GST valuation rules is the process of paying taxes on the percentage value of the supply of the goods or services. This is known as Ad-Valor-Em.

As per Section 15 of GST Act, it is defined that any value of goods or services or supply or both shall be the transaction value; it is the price which has been made paid or payable for the supply of goods or services. Here the supply of goods or services is not related to each other. Price is the sole consideration value.

According to the valuation rules:

• Section 9 of GST states that there shall be levied a tax called Central Goods and Service Tax on all intrastate supply of goods or services, on the value determined under section 15 of GST.
• Section 5 of IGST states that there shall be levied a tax called Integrated Goods and Service Tax on all Inter-State Supply of goods or services where value is determined u/s 15 of CGST act and such rates.

Illustration

Mr. X is the proprietor of ABC Pvt Ltd. ABC is the business of the supply of eco-friendly air conditioners for which specialized installation is required, which is provided by the ABC Pvt Ltd, and installation charges are extra. It is an eco-friendly air conditioner. The government has awarded him with the reward and it is provided with the specialized subsidy to buyer, and 20 percent shall be borne by the Government of India^[1]. The company has already informed its buyers that freight is extra, which is reduced in the final invoice, payable by the buyer. All the air conditioners were sold to unrelated parties.

Valuation of prices is done as per Section 15 of GST.

The concept here means that

• Including the amount incurred by the recipient on behalf of the supplier in the transaction value. This has been explained in the case of Mc Dowell and Co. Ltd v/s Commercial Tax Officer (1985) which states that in the hands of the buyer the cost of the alcohol has been charged by the appellant under its invoice together with the excise duty which the buyer has directly paid on seller’s account. The Consideration for the sale is thus the total amount and now what is reflected in the bill.

It can be concluded that section 15 of the CGST Act and Determination of Value of Supply, CGST Rules, 2017 contains the provision for the valuation of supply of goods and services.

Interpretation of Section 15

1. When Consideration is not wholly in money-

Where the value of goods or services is taken is not in money, the value of supply shall be computed as;

• Take the open market value of such supply.
• If Open market value is not available then, sum total of Consideration in money.
• The valuation of supply of goods or services, if not available in money, then in quality or in-kind.
• Example- where a new laptop is supplied at Rs 30,000/- along with the exchange of the old laptop and the price of the new laptop without exchange is Rs 35,000/-. The open market value of the laptop is Rs 35,000/-
• It includes cases where the buyer gives other goods in exchange or barter.

2. Valuation of supply of goods or services between related persons not via an agent

• In this, the supplier and recipient are inter-related to each other.
• Take the open market value of such a supply of goods or services.
  Take in quality or kind.
• If the recipient can get a full input tax credit, the bill’s value for goods or services as supplies shall be deemed to be the open market value/ price of goods or services.

3. Valuation of goods or services via an agent

• The value taken between the principal and agent shall be the value.
• The open market value of the goods being supplied
• Ninety percent of the price charged from the supply of goods, to be taken at the option of the supplier.

Example:

Where a principal supplies rice to his agent and an agent supplying rice to the subsequent agent in the like quantity and kind. The following supplies at the price of Rs. 5000/- per quintal on the day of supply.  Another supplier sells the same rice of like kind and quality at Rs. 4550/- per quintal.

The valuation by the principal of supplies shall be determined on the 90 percent of the supplies, it is Rs.4550/-, or the supplies made by the principal shall be RS 4550 per quintal. 

4. Valuation of goods or services on the cost method

When it is difficult to compute the cost of supplies of goods or services at the methods prescribed above. According to the Valuation Rules, supplies shall be computed on the basis of 110% of the COI of such goods or cost of production or manufacture or cost of acquisition of services.

5. Valuation Rules of services in case of pure agent

It means that expenditures which have incurred by the supplier as the pure agent as the recipient of the supply of services. It shall be excluded from the supply of service.

Exclusion while computing GST (Section 15(3))

As per the valuation rules, the valuation shall not include the following discounts –

1. The discount has been duly recorded in the invoice issued in the respect of supply.

2.  Supply has been effectively provided two conditions are fulfilled-

• Such discount has been established in the agreement on or before the terms was settled.
• ITC (INPUT TAX CREDIT) is attributable to such discount.

Conclusion

Read our article:Time, Place and Value of Supply under GST