Valuation of goods and services is an important aspect which determines the amount of tax to be levied. If goods and services are undervalued, it leads to short-payment of tax, leading to non-compliance and resultant legal implications. Overvaluation will result in loss of revenue for businesses by way of additional taxes. In order eliminate ambiguities and avoid litigation due to inaccurate or flawed valuation of goods and services, valuation methods have been provided by the law which act as guidelines to businesses while determining the accurate taxable value.
In our earlier blog How is the Value of Goods & Services Determined under GST? we have discussed about the various valuation methods in the current regime, and also about determining the value of supply liable for levy of tax on the basis of transaction value under GST.
Transaction value can be applied as a method of valuation when price is the sole consideration for supply, and both the supplier and the recipient are not related (read this blog post on related parties transactions under GST).
However, in cases where price is not the sole consideration for supply or if supply happens between related persons or distinct persons (between 2 units belonging to the same PAN), the transaction value method cannot be applied. In such cases, different metrics have been defined under valuation rules to determine the taxable value of supply. The following are various scenarios:
- Value of supply of goods or services where the consideration is not wholly in money
- Value of supply of goods or services or both between distinct or related persons
- Value of supply of goods made through an agent
In this blog, let us discuss about the valuation of supply of goods or services where the consideration is not wholly in money.
Before we infer ‘consideration for supply not wholly in money’, let us go back to the early days of civilization where trading was done for exchange of goods, popularly known as the ‘Barter System’. Under this system, people exchanged goods or/and services for other goods or/and services in return, without any consideration in money. Today the century old system of barter has comeback an improvised way- the “Exchange Offer”. Under this scheme, goods are sold in return for a consideration partially in money and partially in exchange of old goods. For an example, a washing machine is sold for Rs.25,000 after exchange with an old washing machine.
If you assume that Rs.25,000 is the transaction value in the above example, you will be in trouble and it may potentially lead to litigation. This is because Rs.25,000 is only a part of the price received as consideration for supply of the washing machine and it is not sole price which is required for applying transaction value. Hence, for such type of supplies, the value of supply should be derived by applying the following metrics:
- Open Market Value of such supply
- If the open market value is not available, the sum total of consideration in money and the monetary value of consideration not in money, if such monetary value is known at the time of supply.
- If the value cannot be determined by applying steps 1 and 2, the value of supply of goods or/and services of like kind and quality will be considered
Let us understand each of these metrics for deriving the value of supply with examples.
1. Open market value of supply
Open market value of supply of goods or services is the full value in money, excluding the GST and cess payable by a person for a transaction.
Let us consider the example of a washing machine. A washing machine is supplied at Rs.25,000 for exchange with an old washing machine. If the price of the washing machine without exchange is Rs.30,000, then the open market value will be Rs.30,000, and hence, GST will be levied on this value.
2. Sum total of consideration in money and the monetary value of consideration not in money
This method of valuation is applicable when the open market value of goods or services is not available. To arrive at the taxable value, the amount received in money is added with the monetary value of the products or services received as consideration.
Taxable Value = Consideration in Money + Monetary value of consideration not in money
Prestige Innovators supplied a new invertor AC to a loyal customer prior to its launch for Rs.45,000 along with an offer of exchanging an old AC. The value of the old AC at the time of supply was Rs.10,000, but the open market value of the invertor AC supplied is not available.
To arrive at the taxable value, Prestige Innovators cannot apply the transaction value as price is not the sole consideration. The open market value cannot be applied either as the market value is not available. In such a case, the taxable value will be the sum total of the consideration received in money plus the monetary value of the product or services received as consideration. Hence, the taxable value of supply of AC will be:
Consideration in money Rs.45,000 + Monetary Value of the AC Rs.10,000 = Rs.55,000
3. Value of supply of goods and/or services of like kind and quality
This method is applicable when the open market value of the goods or services is not available and the value cannot be determined by applying the consideration in money and the monetary value of consideration not in money. In such a case, the value of supply of goods and/or services will be determined based on the prices of products of the ‘like kind and quality’ of the product being supplied. The value of products of ‘like kind and quality’ is determined by considering factors like the goods and services supplied should have the same characteristics, quality, quantity, functional components, materials, and reputation or it must closely or substantially resemble goods or services in question.
Modern Technologies Ltd has introduced a new product ‘IOT-Universal Remote Organiser’ which is being offered to customers as part of the product promotion. In this case, as the product is being introduced for the first time, the value cannot be determined by applying the ‘Open Market Value’ method or by considering the ‘consideration in money and the monetary value of the consideration not in money’. In this case, to determine the value, the last method – comparing with a product of ‘like kind and quality’ can be applied.
Innovative Solutions has a product which is being sold at Rs.10,000, which has similar configuration and functionalities, and with additional USB port. Hence, the value of ‘IOT-Universal Remote organiser’ will be valued at Rs.10,000 for the purpose of tax assessment.
If for any reason the above method cannot be applied for determining the value of supply, it will be determined by applying the cost of the product+ 10 % or by using the residual method. This will be explained in detail in our upcoming blogs.
1. Value of supply of goods or services or both between distinct or related persons
2. Value of supply of goods made through an Agent