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GST –ValuationBombay Chartered Accountants’ Society
9th September 2016
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Agenda
1. Overview of valuation provisions in Model GST Law, and comparison with present provisions
2. Points of representation on valuation provisions
1. Overview of valuation provisions
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S.3 – Meaning and Scope of Supply
» Supply includes:
› All forms of supply of goods and services such as sale, transfer, barter, exchange, license, rental, lease, and disposal
› For consideration
› In course or furtherance of business
› Import of service
› Whether or not for consideration
› Whether or not in course or furtherance of business
› “Specified supplies”, without consideration (Schedule I)
› Permanent transfer/disposal of business assets
› Temporary application of business assets to a private or non-business use
› Services put to a private or non-business use
› Assets retained after deregistration
› Supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.
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S.15 – Value of Taxable Supply
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
Conditions: Where –
1. The supplier and the recipient of the supply are not
related
2. The price is the sole consideration for the supplyIF
Prescribed inclusions under s.15
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S.15 – Value of Taxable Supply
The transaction value under sub-section (1) shall include:
a) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the
recipient of the supply and not included in the price actually paid or payable for the goods and/or services
b) the value, apportioned as appropriate, of such goods and/or services as are supplied directly or indirectly by the
recipient of the supply free of charge or at reduced cost for use in connection with the supply of goods and/or
services being valued, to the extent that such value has not been included in the price actually paid or payable
c) royalties and licence fees related to the supply of goods and/or services being valued that the recipient of
supply must pay, either directly or indirectly, as a condition of the said supply, to the extent that such royalties
and fees are not included in the price actually paid or payable
d) any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the
IGST Act
e) incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply,
including any amount charged for anything done by the supplier in respect of the supply of goods and/or
services at the time of, or before delivery of the goods or, as the case may be, supply of the services
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S.15 – Value of Taxable Supply
The transaction value under sub-section (1) shall include:
h) any discount or incentive that may be allowed after the supply has been effected
Provided that such post-supply discount which is established as per the agreement and is known at or before the
time of supply and specifically linked to relevant invoices shall not be included in the transaction value.
The transaction value under sub-section (1) shall not include any discount allowed before or at the time of supply
provided such discount is allowed in the course of normal trade practice and has been duly recorded in the invoice
issued in respect of the supply.
f) subsidies provided in any form or manner, linked to the supply
g) any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the
supply of goods and/or services
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S.15 – Value of Taxable Supply
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
Conditions: Where –
1. The supplier and the recipient of the supply are not
related
2. The price is the sole consideration for the supplyIF
Determination as per Valuation Rules if:
15(1) not fulfilled:
i. Consideration is not money, wholly or partly
ii. Parties are related
15(4) other cases:
iii. Reason to doubt the truth or accuracy of TV
iv. Specific business transactions (R.8)
► Pure agent, money changer, insurer, air
travel agent, lottery distributor or agent
v. Other notified supplies, as recommended
Prescribed inclusions under s.15
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R.3 of GST Valuation Rules, 2016
Value of goods and/or services shall be the
transaction value, which is the value determined
in monetary terms
Rejection of declared value u/R.7S. TO
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.
Where goods are transferred from:
(a) one place of business to another place of
the same business, or
(b) the principal to an agent or vice versa,
whether or not situated in the same State, the
value of such supply shall be the TV
TV shall be accepted even where supplier and
recipient are related, provided that the
relationship has not influenced the price
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GST Valuation Rules, 2016
R.4 – Compared value
Value shall be determined on the basis of the TV of goods and/or services of like kind and quality supplied at or
about the same time to other customers
› Adjustments to be made by proper officer, taking into account:
› Difference in the dates of supply
› Difference in commercial and quantity levels
› Difference in composition, quality and design
› Difference in freight and insurance charges depending on the place of supply
R.5 – Computed value
Value shall be based on computation, which shall include:
› Cost of production, manufacture or processing of the goods or, the cost of provision of the services
› Charges, if any, for the design or brand
› Amount towards profit and general expenses for same class or kind of goods and/or services
R.6 – Residual valuation methodology
Value shall be determined using reasonable means consistent with the principles and general provisions of the
Rules
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GST Valuation Rules, 2016
R.7 – Rejection of declared value
› Officer having reason to doubt the truth or accuracy of the value declared may ask the supplier to furnish
further information/documents/other evidence
› In the absence of any response or if the officer still has reasonable doubt, 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(1) and recourse will be to rules 4 through 6
Reasons to doubt the truth or accuracy of the value declared shall include, but not be limited to the following:
› Significantly higher value of supplies at or about the same time in comparable quantities in comparable
commercial transactions
› 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
› Mis-declaration of goods and/or services in parameters such as description, quality, quantity, year of
manufacture or production.
Process:
› Intimation to supplier in writing the grounds for doubting the truth or accuracy of value declared
› Reasonable opportunity of being
› Explanation provides that R.7 by itself does not provide a method for determination of value
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Comparison with Present Valuation Provisions – Central Excise
Ref. Situation Valuation Method
S.3 of CEA
S.4 of CEA
S.4A of CEA
Specific duty
TV
RSP-based value
It may be specified whether the rate notified for customs duty
has to be applied, or whether the conversion per GAAP will be
acceptable
R.4 No effective sale and no selling
price available
Value of similar goods at any time nearest to time of removal,
duly adjusted for difference in dates of delivery
R.5 Goods sold at different place than
place of removal
TV excluding cost of transportation
R.6 Price not sole consideration TV plus additional consideration
No interest inclusion
R.7 Stock transfer to depot NTV
R.8 Captive consumption 110% of cost of production
R.9 Related Party Transaction NTV to unrelated buyer
R.10 Inter-Connected Undertaking If otherwise related, same as R.9; otherwise TV
R.10A Job-worker If cleared from job-worker premises, TV; otherwise NTV
R.11 Residuary Reasonable means consistent with principles and provisions
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Comparison with Present Valuation Provisions – Service Tax
Ref. Situation Valuation Method
R.2A, 2B, 2C Works contracts, money
changing, supply of food
Splitting methodology or composition rate (in each case)
R.3 Where value not ascertainable Equivalent to value charged to provide similar service in ordinary
course where amount charged is the sole consideration
Service provider to determine, which is >= cost of provision of
service
R.5(1) Inclusion of expenditure or costs incurred in the course of provision of service
R.5(2) Exclusion for pure agent
R.6(1) Inclusion of commissions, etc.
R.6(2) Exclusion of deposits, fares, interest on delayed payments, accidental damages, subsidies or grants
not directly affecting value off service
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Comparison with Present Valuation Provisions – VAT
Ref.
Situation
Valuation Method
Sale price ‘Sale price ‘means the amount of valuable consideration paid or payable to a dealer for any
sale made including any sum charged for anything done by the seller in respect of the goods
at the time of or before delivery thereof, other than the cost of insurance for transit or of
installation, when such cost is separately charged
The amount of duties under the Central Excise Act, 1944 or the Customs Act, 1962 or the
Bombay Prohibition Act, 1949, shall be deemed to be part of the sale price of such goods
Sale price shall include the amount received by the seller by way of deposit, whether
refundable or not, which has been received whether by way of a separate agreement or not,
in connection with or incidental or ancillary to, the said sale of goods
2. Points of representation
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Re: S.15 of CGST/SGST Act
Ref. Issue / Concern Suggestions Justification
S.15(1) Exchange rate to be applied for
import of services
It may be specified whether the
rate notified for customs duty has
to be applied, or whether the
conversion per GAAP will be
acceptable
To provide certainty and
prevent disputes as to
quantum of IGST paid
S.15(1) Acceptability of value for
transactions between related
parties
To specify that the pricing accepted
for transfer pricing purposes (under
income tax) will be automatically be
accepted for GST
To provide certainty and
prevent disputes
S.15(2)(b) The provision as presently drafted
will include the value of goods and
services supplied by the recipient
free of cost or at reduced rate,
though the contract does not cover
supply of such goods or services –
by this, the value of not contracted /
unrelated free supplies will also get
included
The value of free supplies where
not contracted / unrelated should
not be included in the consideration
Given that both goods and
services are being taxed
concurrently by the same
taxing authorities, the
exclusion does not result in
tax leakage. Moreover, the
inclusion violates the
principle of transaction
value
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Re: S.15 of CGST/SGST Act
Ref. Issue / Concern Suggestions Justification
S.15(2)(d) The provision seeks to include any
taxes, duties, fees and charges
levied under any other statute other
than the SGST, CGST or the IGST
Act.
Other than Basic Customs Duty
(BCD), taxes and duties should not
be included
In the alternative, rather than an
open ended catch-all provision, the
sub-section should explicitly set out
the taxes that will be includible
Facilitate ease of
calculation of effective tax
rates, and eliminate tax on
tax
To provide certainty and
prevent disputes
S.15(2)(e) The provision seeks to include the
amount of expenses (such as
commission and packing) charged
by the supplier to recipient
including any amount charged in
respect of the supply of goods and
services at the time of or before
delivery of goods or the supply of
services
The valuation provisions should
exclude the costs of delivery, which
is a separate supply of service
This will simplify the
provision, and preclude the
litigation that we are
currently experiencing on
the VAT side (valuation of
goods) and the CENVAT
aspect (what is the point of
sale, and therefore whether
credit should be allowed)
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Re: S.15 of CGST/SGST Act
Ref. Issue / Concern Suggestions Justification
S.15(2)(f) Subsidies provided in any form and
manner, linked to the supply, are
sought to be included
The term ‘subsidies’ should be
clearly defined, and the meaning of
the expression ‘linked to the supply’
should also be clarified
To provide certainty and
prevent disputes
S.15(2)(g) Any reimbursable expenditure or
cost incurred by or on behalf of
supplier in relation to supply of
goods and / or services
The provision should be clear to
provide that any amount (i) linked
to the supply and (ii) charged (i.e.
recovered) by the supplier will be
included
Related to this, the ‘pure agent’
conditions should be streamlined
To provide certainty and
prevent disputes
S.15(2)(h) The provisions disallows
adjustment of post facto discounts
This condition should be deleted,
and such discounts should be
allowed, so long as they are
granted within a fixed period (say
the end of the FY)
Such a disallowance
violates the principle of
transaction value, given
that such discounts are
part of business
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Re: GST Valuation Rules
Ref. Issue / Concern Suggestions Justification
R.3(4) The rule provides for acceptance of
transaction value in case of related
party transactions where the
relationship has not affected the
price
In respect of services, the
benchmarking should only be
undertaken for transactions above
the threshold levels for international
transactions or specified domestic
transactions (under transfer pricing)
It is necessary that the Rules
provide for a methodology that
assessees can adopt to evidence
that the relationship has not
affected the price, failing which the
assessees will have to justify
pricing adopted without a
framework to accept the
justification, which is bound to lead
to disputes and litigation.
Services have to be
distinguished from goods
when it comes to price
benchmarking.
Further, the compliance
burden is too onerous
To provide certainty and
prevent disputes
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Re: GST Valuation Rules
Ref. Issue / Concern Suggestions Justification
R.4(1) The rule provides for the
transaction value of goods and
services of the like kind and quality
being the basis for valuation
The rule should not apply to
services
The Act should enable advance
pricing agreements with the tax
office
It is impossible to compare
services supplied by
different persons to
different customers, and
therefore this provision can
lead to arbitrariness, and
harassment
To provide certainty and
prevent disputes
R.5 The computed value rule precludes
the possibility of goods and
services being supplies below cost,
thought this may be justified, as
now even held by the Supreme
Court in FIAT Motors.
The provisions should contain a
carve-out for supplies made below
cost, where the assessee
documents the basis of such
pricing.
It needs to be recognized
that some transactions may
be at or below cost for
economically justifiable
reasons, and the provisions
need to allow for this.
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Re: GST Valuation Rules
Ref. Issue / Concern Suggestions Justification
R.6 The provision states that where the
value of the goods and services
cannot be determined under the
provisions of R 5, the value shall be
determined using reasonable
means consistent with the
principles and general provisions of
these rules
This method is vague and should
be avoided (it cannot be applied for
services the way presently applied
for customs valuation)
Rather, the Act should enable
advance pricing agreements with
the tax office
It is impossible to compare
services supplied by
different persons to
different customers, and
therefore this provision can
lead to arbitrariness, and
harassment
To provide certainty and
prevent disputes
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Re: GST Valuation RulesRef. Issue / Concern Suggestions Justification
R.6 There is no ‘negative list’ to
discourage the application of
arbitrary values by the assessing
officer
To avoid litigation on valuation
aspects, it is suggested that the
GST provisions set out specific
limitations on tax officers in respect
of applying alternative valuation
bases. There is precedent on the
inclusion of such provisions in the
Notes to the Customs Valuation
Rules, where a ‘negative list’ has
been set out, and may be
incorporated into the Rules – for
example:
1. The price charged by other
suppliers, or
2. A system which provides for the
acceptance for the highest of
alternative values, or
3. Minimum values, or
4. Arbitrary or fictitious values
To provide certainty and
prevent disputes
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Re: GST Valuation RulesRef. Issue / Concern Suggestions Justification
R.7 The power to reject declared value
is with the proper officer
The powers in the draft provisions
confer wide powers on the tax
officers to reject declared value. In
the interest of ensuring uniformity
in the application of provisions, and
that discretion of the officers is
minimized, it is suggested that the
rejection of declared value should
be made subject to approval of a
Commissioner.
Approval by a competent
officer will add value to the
proper determination of
value and safeguard
against discretionary use of
powers
R.8 Exclusion under the provisions of
‘pure agent’ is too cumbersome
and has been litigious in service tax
The provision should be clear to
provide that any amount (i) linked
to the supply and (ii) charged (i.e.
recovered) by the supplier will be
included, and everything else is
excludible
Accordingly, the ‘pure agent’
conditions should be streamlined
To provide certainty and
prevent disputes
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GST Valuation Rules, 2016
» 2 new definitions:
› ‘goods of like kind and quality’ means goods which are:
› identical or similar in physical characteristics, quality and reputation as the goods being valued
› perform the same functions or are commercially interchangeable with the goods being valued
› supplied by the same person or by a different person
› ‘services of like kind and quality’ means services which are:
› identical or similar in nature, quality and reputation as the services being valued
› supplied by the same person or by a different person
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Related persons
» Persons shall be deemed to be “related persons’’ if only -
› they are officers or directors of one another's businesses
› they are legally recognized partners in business
› they are employer and employee
› any person directly or indirectly owns, controls or holds 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
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