GOODS AND SERVICE TAX VALUATION – DRAFT RULES

[Mr. M. GOVINDARAJAN]

The Central Government has put on the domain the draft rules entitled ‘Goods and Service Tax Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016.  These Rules are applicable to the supply of goods and services under the IGST/CGST/SGST.

Transaction value

Rule 2(1) (d) defines the term ‘transaction value’ as the value of goods and/or services within the meaning of section 15 of the CGST Act.  Section 15 of the Model GST Act gives provisions for determining the value of supply.

Section 15(1) of the Act provides that The value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Section 15(2) provides that the transaction value shall include-

• 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;
• 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;
• 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;
• any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the IGST Act;
• 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;
• subsidies provided in any form or manner, linked to the supply;
•  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;
• any discount or incentive that may be allowed after the supply has been effected; 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 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.

Section 15(4) provides that the value of the supply of goods and/or services in the following situations which cannot be valued under sub-section (1), shall be determined in such manner as may be prescribed in the rules;

• the consideration, whether paid or payable, is not money, wholly or partly;
• the supplier and the recipient of the supply are related;
• there is reason to doubt the truth or accuracy of the transaction value declared by the supplier;
• business transactions undertaken by a pure agent, money changer, insurer, air travel agent and distributor or selling agent of lottery;
• such other supplies as may be notified by the Central or a State Government in this behalf on the recommendation of the Council.

Goods of like kind and quality

Rule 2(1)(b) defines the phrase ‘goods of like kind and quality’ as goods which are identical or similar in physical characteristics, quality and reputation as the goods being valued, and perform the same functions or are commercially interchangeable with the goods being valued and supplied by the same person or by a different person.

Services of like kind and quality

Rule 2(1)(C) defines the phrase ‘services of like kind and quality’ as  services which are identical or similar in nature, quality and reputation as the services being valued and supplied by the same person or by a different person.

Methods to determine value

The transaction value shall be the value determined in monetary terms.   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.  The transaction value shall be accepted even where the supplier and recipient of supply are related, provided that the relationship has not influenced the price.

If the goods are transferred from-

• one place of business to another place of the same business;
• the principal to an agent or from an agent to the principal,

whether or not situated in the same State, the value of such supply shall be the transaction value.

Methods to determine value under Section 15(4)

The value of supplies specified in sub-section (4) of section 15 of the Act shall be determined by the following methods-

• Determination of value of supply by comparison;
• Computed value method; and
• Residual method.

Rule 4 provides the method to determine value of supply by comparison.  Rule 4(1) provides that where the value of a supply cannot be determined under rule 3, the value shall be determined on the basis of the transaction value of goods and/or services of like kind and quality supplied at or about the same time to other customers, adjusted in accordance with the provisions of Rule 4(2).

Rule 4(2) provides that In determining the value of goods and/or services under sub-rule (1), the proper officer shall make such adjustments as appear to him reasonable, taking into consideration the relevant factors, including-

• difference in the dates of supply;
• difference in commercial levels and quantity levels;
• difference in composition, quality and design between the goods and/or services being valued and the goods and/or services with which they are compared;
• difference in freight and insurance charges depending on the place of supply.

Rule 5 provides that if the value cannot be computed under Rule 4 then it shall be based on a computed value which shall include the following-

• the 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;
• an amount towards profit and general expenses equal to that usually reflected in supply of goods and/or services of the same class or kind as the goods and/or services being valued which are made by other suppliers.

Where the value of the goods and/or services cannot be determined under the provisions of rule 5, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules.

Rejection of declared value

When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any goods and/or services, he may ask the supplier to furnish further information, including documents or other evidence.  After receiving such further information, or in the absence of any response from such supplier, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, it shall be deemed that the transaction value of such goods and/or services cannot be determined under the provisions of Rule 3(1).

The reasons to doubt the truth or accuracy of the value of the supply declared by the supplier shall include, but not be limited to the following-

• the significantly higher value at which goods and/or services of like kind or quality supplied at or about the same time in comparable quantities in a comparable commercial transaction were assessed;
• the 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; or
• any mis-declaration of goods and/or services in parameters such as description, quality, quantity, year of manufacture or production.

The proper officer shall intimate the supplier in writing the grounds for doubting the truth or accuracy of the value declared in relation to the supply of goods and/or services by such supplier and provides a reasonable opportunity of being heard, before taking a final decision.  If after hearing the supplier as aforesaid, the proper officer is, for reasons to be recorded in writing, not satisfied with the value declared, he shall proceed to determine the value in accordance with the provisions of rule 4 or rule 5 or rule 6, proceeding sequentially.

Pure Agent

‘Pure Agent’ means a person who-

• enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
• neither intends to hold nor holds any title to the goods and/or services so procured or provided as pure agent of the recipient of service;
• does not use such goods and/or services so procured; and
• receives only the actual amount incurred to procure such goods and/or services.

The expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely-

• the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods and/or services procured;
• the recipient of service receives and uses the goods and/or services so procured by the service provider in his capacity as pure agent of the recipient of service;
• the recipient of service is liable to make payment to the third party;
• the recipient of service authorizes the service provider to make payment on his behalf;
• the recipient of service knows that the goods and/or services for which payment has been made by the service provider shall be provided by the third party;
• the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
• the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
• the goods and/or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Money changer

The value of taxable service provided for the services in so far as it pertains to purchase or sale of foreign currency, including money changing, shall be determined by the service provider in the following manner-

• for a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India reference rate for that currency at that time, multiplied by the total units of currency;
• where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money;
• in case where neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI.