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Value of supply

Value of Supply under GST: Understanding the Valuation of GST

Jun 10, 2022

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Value of Supply under GST

GST has introduced the concept of “One Nation, One Tax”. As it is not so old regime, sometimes a lot of questions come up in the mind of individuals. Among others, the value of supply under GST is one of the crucial aspects. Value of supply under GST is the transaction value along with certain elements which comprise of Price of the good plus the cost of supply between the unrelated persons. 

As there is a couple of combination which can be formed, the buyer can pay in monetary aspect, non-monetary aspect, or either by monetary-cum-barter manner. This emphasizes over accurately determining the value of supply. As GST has removed the earlier tax regime comprising of Excise duty, VAT, and Service tax, the valuation holds a lot of importance.

Value of Supply under GST is further divided into 5 aspects, which are:

  1. Supply is made to unrelated persons (where the price is the sole consideration).
  2. The Supply is made to a related person.
  3. Where the price is not the sole consideration
  4. A Supply that is notified under section 15(4)
  5. Supply in case of Pure Agent

 

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Let’s Understand how to calculate the value of supply under GST for each of these types:

Part 1 Unrelated Person

An unrelated person means that entities are not related to each other. Under Section (4) and Section (5) it states. The supply in this condition is considered with three aspects-

  1. With the open market valuation
  2. With the value of goods or services 
  3. And even the above two conditions don’t work then rule 30 or rule 31 is applicable.  

(if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order: Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to 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: Provided further that where the recipient is eligible for the full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.)

Part 2 Related Person

A related person means, for example, a giant organization has two separate legal entities but they come under the same brand name, which has common control is called a ‘Related Person’. 

In this case, the value of supply will be determined by three conditions as

  • With respect to the open market value of supply. 
  • If the above information is not available then the value of goods or services is considered.
  • And finally, even if the cost is not being able to be determined then Cost based or Residual Method is used 

Part 3 Price is not the sole consideration

As different types of businesses these days witness a lot of different schemes which gives buyers an immense opportunity to evaluate products & services given by sellers. In such a complex case, there are three criteria to look upon. They are:

  • Open Market Value (OMV), is the amount that is spread across the market.
  • If not OMV, then the value of supply which is taken into consideration at the time of supply, which means that the monetary value will be taken up into consideration
  • And even if the valuation is not possible then via Cost Method or Residual Method one can proceed.

 Part 4 Notified Supply

Sub-Section 15(4) & (5) states that valuation will be carried out with respect to open market value supply further,& the valuation can be determined in a manner that is stipulated in the rules of valuation 

Part 5 Pure Agent

Principal and Agent are the two business individuals which play an important role in the supply of goods/ services. The principal is the person on whose behalf the agent carries out the business and the agent means the one who fulfills the following criteria:

  1. Doesn’t use goods or services for his needs.
  2. Doesn’t hold any title or authority for the goods or service. He/ She just provides the recipient with the desired supply. 
  3. The agent enters into the contractual agreement with the actual recipient of the supply of goods or services and also tends to incur expenditure in the course of the process.
  4. And finally, they receive only the actual amount which they have incurred to procure such goods and services. 

A pure agent can be understood by the following example- If X handles some work on behalf of Y and in the process if X happens to spend money to carry out the Y’s work. So, in this case, X will recover all the extra money spent in carrying out the job. This act and nature are qualities of the pure agent. 

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Value of Mixed and Composite Supply

Mixed Supply: It is a combination of two or more goods or service which is given at a single price.

Composite Supply: It is a combination of two or more goods that are bundled naturally. As the items are naturally bounded they cannot be supplied separately. 

This concept is important because it helps to determine the correct GST rates that have to be applied. Under the Mixed Supply, the tax rates will be charged upon the item which has the highest rate. For example, in a festive hamper box, the GST will be levied on the product which has the highest cost. Whereas, in the case of Composite supply, the principal item is taxed because it is the one governing the whole bundle cost.

Identifying the difference between mixed and composite supply is tough work. But with a single question “Can items be sold separately?” can resolve the issue. For any bundle, if each item can be sold separately then it will be mixed supply, and if not then it would be composite. 

Valuation Methods for Value of supply under GST

There are two methods that are taken into consideration while evaluating the goods and services under GST. These two methods are considered to be the last choice for finding the valuation of the product or service.

The two methods are Cost-Based and Residual Methods. In the prior method, when the valuation of goods or services can’t be carried out by any other means then the option remains to calculate the cost of production or manufacturing of the service or product at 110% of the cost of manufacturing or cost of furnishing services. For example, if the cost of a cup manufactured by Clay Craft is Rs. 400 whereas the market cost of similar cups manufactured by other is Rs. 350. If one doesn’t get open market value then Rs.400 + Rs. 400 * 110%   is the value that will be calculated. 

In the second method, where the supplier is not able to able to find any means of valuation of goods or services then he/ she is free to choose the method of his/her own choice given the condition that one should not exploit the freedom given. A method that can justify the inquiry should be practiced. For example, the amount of labor working hours is variable, but an average number should be taken into consideration while calculating the amount of work and the cost associated with it. 

Under the Discount Condition

A discount is anything that offers a deduction from the usual cost. It is offered before or at the time of supply of goods. There are three conditions for a discount should take care:

  1. The discount should be mentioned before any agreement 
  2. It should be clearly traced
  3. And, input tax credit aspect be taken care of

When the discount is given just after the price is being paid, that is, the discount was not agreed upon at the time of supply (or not traceable to the relevant invoice) then there is no deduction allowed from the transaction value.

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