Comparative analysis of Valuation under GST vis-a-vis Excise laws

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Comparative analysis of Valuation under GST vis-a-vis Excise laws,  Valuation of Goods and/or Services “A detailed analysis under GST regime vis-à-vis Central Excise Rules”. Now check more details for “”Comparative analysis of Valuation” from below…

Contents

Comparative Analysis of Valuation – Introduction

The dictionary meaning of the word valuation means the monetary worth of something. Valuation is of prime importance for the purpose of collection of duty and levy of appropriate taxes. The relevance of correct valuation of goods/ services in the existing law as well as in the proposed GST regime needs no explanation.

Valuation under GST

Under the existing Tax structure the valuation of goods/ services have been dealt under different laws such as-

  • Customs Valuation (Determination of Price of Imported Goods) Rules, 2007
  • Customs Valuation (Determination of Price of Export Goods) Rules, 2007
  • Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000
  • Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008
  • Service Tax (Determination of Value) Rules, 2006

However under the GST regime following references have been made-

  • Central Goods & Services Act 2017- Chapter IV, Section 15
  • Integrated Goods and Services Tax Act 2017-Chapter IX, Section 20
  • Goods and Services Tax Rules- Determination of Value of Supply

Comparative analysis of Valuation

Value of a taxable supply under GST

The basis for valuation of supply of goods/ and services under the GST regime is the “Transaction Value” of Goods/ and services. Unlike the existing law, there are no separate provisions for valuing the goods on MRP/ Assessable Value/ RSP etc thereby removing the demarcation between the packaged and unpackaged goods. It clearly deals with only one aspect i.e. “Transaction Value”

As per Sec 15(1) of the CGST Act 2017,

The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Main Conditions for the applicability of Sec 15(1)

  1. It is “applicable” to both goods and services
  2. Transaction value is the “price” of the goods/ services
  3. Price is the only form of “consideration”
  4. The transaction should be between “unrelated parties”

Meaning of the terms

1.Consideration- As per Section 2(31) “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

2.Related Parties-Explanation to Sec 15-

(a) persons shall be deemed to be “related persons” if–

  • (i) such persons are officers or directors of one another’s businesses;
  • (ii) such persons are legally recognised partners in business;
  • (iii) such persons are employer and employee;
  • (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
  • (v) one of them directly or indirectly controls the other;
  • (vi) both of them are directly or indirectly controlled by a third person;
  • (vii) together they directly or indirectly control a third person; or
  • (viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Inclusions and Exclusions in the Value of Supply

Sec 15(2 & 3) of the CGST Act 2017 explains the specific items of inclusions and exclusions while determining the transaction value for the supply of goods/ services. Unlike the existing laws, this section talks about only a certain type of specific items which are to be considered while valuing the goods / and services for levy of the applicable tax rate.

Specific Inclusions-Sec 15(2) Specific Exclusions- Sec 15(3)
a.   any taxes, duties, cesses, fees/ charges levied under any law in force other than GST , if charged separately by the supplierb.   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 or services or both

c.   incidental expenses, including commission and packing, and any amountcharged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services

d.   interest or late fee or penalty for delayed payment of any consideration for any supply

e.   subsidies directly linked to the priceexcluding subsidies provided by the Central Government and State Governments

Note- the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy

The value of the supply shall not include any discount which is given

a.    Before or at the time of the supply b.    After the supply has been effected
Conditions to be satisfied for exclusion1.discount  recorded in the invoice issued in respect of such supply Conditions to be satisfied for exclusion1.discount is established in terms of an agreement entered into at or before the time of such supply

2.specifically linked to relevant invoices

3.input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply

Explanation

1. Inclusion of Taxes- any taxes, duties, cesses, fees/ charges levied under any law in force other than GST , if charged separately by the supplier

Example- If the value of the goods(say cigarettes) includes both GST and excise duty, then for calculating transaction value under Sec 15(2a), the value of excise duty will be included and value of GST will not be included

2. Supplier is liable to pay amount- 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 andnot included in the price actually paid or payable for the goods or services or both

Example-Where transportation has been arranged by the supplier & contract terms are Ex-Works and freight outward or any expenditure upto destination of recipient has been directly paid by the recipient to the transporter, then freight outward etc will not be included in the transaction value of the supply because supplier is not liable to pay these expenses

3. Incidental expenses-including commission and packing, and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services

Example-Apple Inc sold an I-Phone to the customer for Rs. 82000/- and Customer asked for special type of packing worth Rs. 3400/-, delivery to directly to the customer address for which Apple Inc charged separately Rs. 800/-. Then Rs. 86200 will be the transaction value for levy of GST.

4. Interest or late fee or penalty for delayed payment of any consideration for any supply

Example-X & Y are non related persons, X has raised an invoice on Y for Rs. 12 lacs for the sale of truck. The payment was to be made by the stipulated timeline say within 30 days of the raising of invoice, but Y made the payment after 30 days. X charged Y with late payment fees @ 10 %, hence the transaction value would be Rs. 13.20 lacs.

5. Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments

Example-

Cases To be included in the transaction value
Subsidy received from Central Govt/ State Govt for setting up factory by Pepsi
Subsidy received from NGO for setting up of factory by Pepsi
Subsidy received from Central/ State Govt for setting up Factory as well as for the per unit cost price of Lays by Pepsi
Subsidy received from NGO for setting up of factory by Pepsi as well as for per unit cost price of Lays by Pepsi
Subsidy received from Central Govt/ State Govt for per unit cost price of Lays by Pepsi
Subsidy received from NGO for per unit cost price of Lays by Pepsi

Determination of Value of Supply Rules

Sec 15(4) explains that, Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed. 

In other words we can say that these rules are to be applied in case any of the following condition arises-

  1. The price is not the sole consideration for the supply made as per Sec 7 of CGST Act 2017
  2. The consideration is not wholly in money i.e. supply as per schedule 1 of CGST Act 2017
  3. The supplier and recipient are related persons as per the explanation to Sec 15
Rule  
1 Where the consideration is not wholly in money
2 Supply is between distinct/related persons, other than through an agent
3 Supply made or received through an agent
4 Supply based on cost
5 Residual method
6 Determination of value in respect of certain supplies
7 Value of supply of services in case of pure agent
8 Rate of exchange of currency, other than Indian rupees, for determination of value
9 Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax

Explanation

Rule 1-Value of supply of goods or services where the consideration is not wholly in money

Applicable when

  • Consideration partly in money and partly in kind
  • Consideration wholly in kind
  • Exchange offers/ Barter System

Value to be ascertained in the sequential order stated below

Value to be ascertained in the sequential order

*open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made” ** “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.

Rule 2- Value of supply of goods or services or both between distinct or related persons, other than through an agent

Applicable when

  • Transaction is between distinct persons as per Sec 25(4&5)/ related persons
  • Distinct persons will have the same PAN
  • Related persons are not the agents
  • Price is the sole consideration
  • If the goods are not intended for further sale

Value to be ascertained in the sequential order stated below

Value to be ascertained in the sequential order stated below

Proviso to Rule 2- applicable only to Goods

Further sale of goods-Where “goods” are intended for “further supply” by the “recipient” to a “non related person”, then the supplier may exercise his right to value the supplies @90% of the price charged for the goods of like kind & quality

For example-

HO sells the goods to its branch office for Rs. 0.90 lacs/- and for Rs. 1 lacs directly to its customers. In this case the transaction value will be Rs. 1 lacs

If “these” goods “as such” are sold by branch to customer for Rs. 1 lacs, & similar type of goods are sold to another customer for Rs. 1.5 lacs, then HO may decide to value these goods @90% of Rs. 1.5 lacs.

Recipient is eligible for “Full” Input Tax Credit- value declared in the invoice shall be deemed to be the open market value of goods or services

Rule 3- Value of supply of goods made or received through an agent

Applicable when

  • Agent of the supplier is supplying the goods/ services to the customers
  • Price is the sole consideration

Value to be ascertained in the sequential order stated below

If a is not available

  1. Open market value of such supply
  2. As determined under Rule 4 or 5

Rule 4- Value of supply of goods or services or both based on cost

Applicable when

  • Value of supply is not determinable under any of the preceding rules 1-3

Value to be ascertained @ 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services. 

Rule 5- Residual method for determination of value of supply of goods or services or both

Applicable when

  • Value of supply is not determinable under any of the preceding rules 1-4

Value to be ascertained using reasonable means consistent with the principles and general provisions of section 15 and these rules

Proviso to Rule 5-The sequential order can be broken in case of determination of value of services i.e. the value may directly be derived using Rule 5 if it is not determinable as per Rule 1-3.

Rule 6- Determination of value in respect of certain supplies

1. Value of supply of services in relation to purchase or sale of foreign currency, including money changing

Option 1For a currency, when exchanged from, or to, Indian Rupees (INR), Option 2Value in relation to supply of foreign currency, including money changing
Total units of currency *(Difference in the buying/ selling rate & RBI reference rate)Separate provisions have been given in case RBI reference rate is not available
% of gross amount of currency exchanged
Rs. 250- Rs.1 lacs 1%
>Rs. 1 lacs- Rs. 10 lacs Rs. 1000/- + 0.5%
>Rs. 10 lacs Rs. 5500/- + 1/10th of a percent subject to max of Rs. 60000/-

2. Value of supply of services in relation to booking of tickets for travel by air provided by an air travel agent

Domestic bookings International bookings
5% of the basic fare 10% of the basic fare

3. Value of supply of services in relation to Life Insurance Business

Amount is intimated to the policy holder at the time of supply of service Investment/ savings amount less amount of Gross Premium charged
Single Annuity policies other than above 10% of the single premium charged from the policy holder
Other cases-where the entire premium paid by the policy holder is not only towards the risk cover in life insurance 1st year- 25% of the premium chargedSubsequent years- 12.5%

4. Buying and selling of second hand goods

Conditions-

  1. Goods supplied as such
  2. Goods supplied after minor processing , not changing the nature of the goods
  3. no input tax credit has been availed on purchase of such goods

Taxable Value of supply=Selling Price less Purchase Price

(negative value to be ignored)

5. Goods Repossessed from a unregistered defaulting borrower for recovery of loan/ debt

Taxable Value of supply=Purchase price of such goods less 5% points for every quarter  between the date of purchase  and the date of disposal by the person making such possession

6. Value of redeemable token/ voucher/coupon/stamp(other than postage stamp)

Taxable Value of supply= money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.

7. Service Providers to be notified by the Govt as referred to in paragraph 2 of Schedule I between distinct persons as referred to in section 25

Taxable Value of supply=NIL

Rule 7 – Value of supply of services in case of pure agent

Applicable when all the three conditions are satisfied

  • Supplier is the pure agent of the recipient
  • Payment made to third party is specifically indicated in the invoice issued by pure agent
  • Supplies procured as a pure agent are in addition to his own supplies

Taxable Value of supply=Value of Supply less expenditure or costs incurred by a supplier as a pure agent of the recipient

Rule 8- Rate of exchange of currency, other than Indian rupees, for determination of value

The rate of exchange for determination of value of taxable goods or services or both shall be the applicable reference rate for that currency as determined by the Reserve Bank of India on the date of time of supply in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.

Rule 9- Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax

Tax amount= Value inclusive of taxes X tax rate in % of IGST or as the case may be CGST, SGST or UTGST

(100+ sum of tax rates, as applicable, in %)

Valuation principles at a Glance

  GST Regime Existing Law-Central Excise
Taxable Event Supply of Goods/ and Services Manufacturing of Goods
Valuation of Goods & Services Commonly dealt under Sec 15 and corresponding Valuation Rules For Excisable Goods– Sec 4 of Central Excise Act 1944For Taxable Services– Service Tax (Determination of Value) Rules, 2006
Taxable Value Transaction Value for both goods and Services For excisable goods- Assessable valueFor Taxable Services- Taxable Value

Excise duty payable on one of following basis

  • ·Specific duty, based on some measure like weight, volume, length etc.
  • Duty as % of Tariff Value fixed under section 3(2)
  • Duty on basis of production capacity – section 3A of Central Excise Act
  • Duty based on basis of Maximum Retail Price printed on carton after allowing deductions – section 4A of CEA
  • Duty as % based on Assessable Value fixed under section 4 (ad valorem duty) (If not covered in any of above)
Conditions for Transaction Value Only 2 conditions i.e.1. Supplier and recipient are not related

2. Price is the sole consideration

4 conditions i.e.

  1. Goods are sold by the assesse
  2. For delivery at the time and place of removal
  3. Assesse and buyer are not related persons
  4. Price is the sole consideration
Reference of Rules 7 specific rules(& 2 general)are given in case above conditions are not satisfied for determining transaction value 11 different rules were given in case above conditions are not satisfied for determining transaction value
Concept of Retail Sale Price/ Maximum Retail Price No such concept Separate rules were there
For goods sold from depot etc Place of removal is immaterial as it is a destination based tax Rule 7 specifically dealt with these type of cumbersome cases
Captive Consumption Concept of distinct person prevails and accordingly the provisions will apply Rule 8  specifically dealt with these cases
Goods sold by Inter Connected undertakings Concept of distinct and related person prevails and accordingly the provisions will apply Rule 10 was dealing with this concept

Conclusion

At present there are numerous provisions dealing with the determination of the value of goods and services , separately under Central Excise Law, State VAT acts and taxability of services under the Service Tax Act. The varied principles and detailed provisions sometimes create ambiguity also which in turn results into non compliance w.r.t various applicable provisions. Under the GST regime, we hope that such type of issues will not arise and our tax structure will get simplified atleast upto some extent. The lucid structure of valuation as explained above apparently gives a clarified impression for the application of the principles. We are approaching towards the target date of implementation of GST which is undoubetdly a revolutionary step towards the progress of the nation. Lets evaluate what this new tax reform has in its basket for the layman as well as for the business giants.

 

On our website we have provided all the details of GST Act 2017. We hope that our article will be helpful for you to understand the GST Act 2017.

 

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