The Importance of Accurate Valuation of New Products And Services For GST Purposes

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Published Date:  26-11-2023   Author:   shradha-kabr
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Introduction

The supply value under the Goods and Services Tax is levied based on the provisions of u/s 15 CGST Act (2017). It is important to determine the correct value of supply for proper taxation. As per the previously mentioned act, the transactional value happens to be the supply value under GST. Transactional value can be defined as the actual price paid for the supply of goods and services. With so many questions about this comprehensive indirect tax, it is vital to understand everything right from the start. Let’s begin with understanding the value of supply under GST, GST valuation importance, and more.

What Do You Mean By The Value Of Supply Under GST?

The value of a supply is the cost or consideration paid by the customer to the supplier. While it includes extra costs like handling and shipping, they are not added to the GST. Some transactions are not considered sales, like transferring stocks from one state to another. In such a scenario, the supply value will be OMV or open market value. It is the amount at which the goods are expected to be sold in the market.

Why Is Accurate Product Valuation Important?

The GST implication significantly depends on the accurate value of products or services sold or transferred. Buyers can make payments by offering the seller cash or electronic money transfer. Non-monetary consideration is another crucial factor for transactions. In this case, sellers offer goods or other services in exchange.

In certain cases, the payments can be made in cash and kind. Therefore, accurate product valuation is important for proper and successful GST implication.

Determining The Value of Supply

Simply put, the value of supply is the price paid for the goods and services, excluding GST. Since certain transactions are performed based on cash and some on barter systems, different provisions are considered for determining the supply value.

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  • The General Valuation Rule is applicable when the buyer pays the entire amount in cash for the goods and services bought. Here, the supply value is the price paid, subtracting the GST on that amount.
  • The Special Valuation Rule applies to some or all the transactions that are performed via trade rather than cash. If the buyer is paying for the entire transaction in trade, the supply value will be open market value, subtracting the GST on that sum. In case the buyer is paying half in cash and half in trade, the supply value will be the cash amount paid in addition to the OMV of the concerned products or services, subtracting the GST.

Some Practical Issues Under GST Valuation

These practical issues will help you understand why accurate valuation matters in GST for new products and services.

#Issue 1

A common issue occurs when the transaction is between two companies having common directors. Mr. A and Mr. B are directors of two distinct companies, holding 20% shares each in both companies. Now, the first company supplies goods to the second one. The issues arise in the method of valuation. Will it be done based on section 15(1) or based on the related person’s provision under clause (a)(i) of section 15?

The answer is that X and Y are common directors, and the valuation will be based on related persons’ provisions.

#Issue 2

Another issue occurs when a husband and wife are partners in respective firms. Let’s suppose Mr. A is a partner of a firm with a 30% share. Besides, his wife is a partner in another firm with a 40% holding. The question arises: will the firms be deemed based on related person provisions under clause (a)(v) if a supply occurs between the two firms?

Section 15 explains that the control is bound to exist if a person directly or indirectly owns or controls 25% or more of the outstanding stocks or shares them.  As per clause v, one of the individuals can control the other.

#Issue 3

A transaction between the firms and their partners is another issue. Suppose Mr. A is a partner in X company with 15% holdings. If there is a supply between Mr. A and the firm, how will it be deemed?

As per section 15, a person only has control if he has 25% shareholding or more. In the above case, the holding is up to 15%, and no control exists. Since Mr. A is a legally recognized partner in the firm, they are related persons.

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#Issue 4

There is no explicit condition of “control” under GST. However, as a general meaning, it conveys the act of having the ability to control someone or something. As per the Companies Act, 2013, Section 2(27), control exists if a person can influence any specific decision in a company. However, control is not necessarily synonymous with ownership. Control can exist with the power to impact a decision in an organization with or without having ownership.

Inclusions From Transactional Value

Inclusion Condition
Any duties, taxes, fees, or charges levied under any law apart from GST If the supplier charges it separately
Any amount that the supplier charges It will be for incidental expenses or others that have been done during or before the supply of goods and services
Any amount that the recipient incurs The supplier was liable to pay it and has not been included in the price
Subsidies that are linked directly to the price Apart from the central and state government subsidies
Late fees, interest, or penalty For delayed payments

Exclusions From Transactional Value

Exclusion ( Any Discounts ) Condition
Offered prior to the supply or during Only if there is a record of such supply in the bill issued in respect of the supply
Offered after the supply has been affected Only if such discount is regarding an agreement during the supply or before it and linked to the respective bill. Also, if the recipient has revered ITC in context to the discount issued by the supplier.

 

Supply Value For Imported Goods And Services

The calculation of the supply value of imported goods is done based on the Customs Act Rules. The supply value in such cases is the imported goods’ custom value plus the paid import duty.

Value Of Supply = Custom Value + Import Duty

The taxable value for the supply of an imported service is the total consideration multiplied by the taxable percentage.

Taxable Supply Value = Total Consideration * Taxable Percentage 

Discounted Supplies And Free Items Under GST

The GST value changes accordingly when the items are sold at a discounted rate. The supply value, in this case, is the discount rate supplied from the item’s original value. The GST is now implied on the supply value rather than the original value.

Let’s move on to marketing strategies regarding free items and their role under GST. For free items, a person cannot receive ITC or input tax credit on items destroyed, lost, written off, or given as gifts and samples.

However, if you want to claim ITC on free items, you can declare their value as a component of taxable supply on your bill. Then, you can collect GST on it. One can go through the CGST Act’s Section 15, 2017, to learn the benefits of precise valuation in GST for new products and services. 

Conclusion

The impact of accurate valuation on GST compliance for new products cannot be overstated. Ensuring precise valuation is not only a legal requirement but a way to be fair in maintaining the taxation system. Accurate tax valuation helps businesses determine their correct tax liability and reduces the risk of errors and disputes. By valuing the goods and services accurately, businesses can prevent overpaying or underpaying GST. It also aids in building trust with the tax authorities and minimizes the likelihood of penalties, audits, and fines. Accurate valuation is also crucial in international trade as it impacts import/export taxes and customs duties. Employing standardized valuation methods and staying informed about updated tax regulations are recommended.

Also Read: Examples Of Exclusions In The Valuation Of Goods And Services

FAQs

1.    What Is The Importance Of Valuation In GST?

GST can only be implied on a taxable supply. Therefore, accurately evaluating the taxable supply is of paramount importance. It helps in preventing tax errors and penalties.

2.    How Has GST Impacted The Pricing Of Your Product Services?

The introduction of GST has removed the cascading impact of taxes on goods and services. It has significantly reduced the taxation burden and minimized manufacturing costs.

3.    What Is The Importance Of Valuation?

Valuation is important as it gives buyers an idea of how much they should pay for a product or service. Similarly, good or service valuation significance lets sellers know how much they should sell something for.

4.    What Is The Value Of Service In GST?

The cost paid for supplying goods or services between two unrelated parties is the transaction value. The supply value under GST includes duties, fees, taxes, charges, etc., levied under any act other than GST.

5.    What Is the Time Of Supply And Valuation Rule Under GST?

The time when goods or services are considered to be supplied is called the time of supply. It is crucial to identify the due dates for paying taxes.

6.    What Is The Rule 27 Of GST?

The value shall be open market value under the Rule 27 of GST.

7.    Which Sector Is Most Affected By GST?

Telecommunication services. IT services, business support services, insurance industries, banking and finance sectors, etc, experience a major tax burden.

8.    How Is GST Applied On Different Products And Services?

The GST rates in India regarding different products and services are divided into four slabs – 5%, 12%, 18%, and 28%. The rates are usually higher for luxury products and low for the necessary items.

9.    What Are The 5 Important Aspects Of Valuation?

Future possibility, potential risk, cash flow, objectivity vs subjectivity, and motivations are five important valuation aspects.

10.   Who Pays More GST?

As per reports, 3-4% of GST comes from the 10% richest people in India, while 40% comes from the middle class.

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Shradha Kabr

Shradha Kabra is an experienced finance writer based in India with 15 years of experience simplifying complex financial topics for readers. Her articles on taxation, Indian stock markets, and other national finance issues are well-researched and presented in an easy-to-understand style. Shradha holds a Double Master's degree and aims to make financial literacy accessible to all through her writing.

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