GST Valuation - Bombay Chartered Accountants' Society ON... · 13-09-2016 | 2 Agenda 1. Overview of valuation provisions in Model GST Law, and comparison with present provisions 2

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GST –ValuationBombay Chartered Accountants’ Society

9th September 2016

13-09-2016 | 2

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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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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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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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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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


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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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


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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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


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


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


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


prevent disputes

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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


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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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


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


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


prevent disputes

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www.voxlaw.in

MUMBAI

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NM Joshi Marg,

Lower Parel (East),

Mumbai 400013

Tel.: 022 6147 1000

NEW DELHI

16, Lower Ground Floor,

Jangpura Extension Market,

New Delhi 110 014

Tel.: 011 4309 1457

AHMEDABAD

302-306 Devpath Complex

Off CG Road

Ahmedabad 380006

Tel.: 070 2646 1526

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» 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

Back

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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

Back

Documents

GST Valuation - Bombay Chartered Accountants' Society ON... · 13-09-2016 | 2 Agenda 1. Overview of valuation provisions in Model GST Law, and comparison with present provisions 2