When you are dealing with the goods or services you supply, one of the main questions that always comes to mind is How much value do I pay GST? The answer lies in how the law defines the value of supply under the Central Goods and Services Tax Act, 2017 (CGST Act) and its related rules. This guide will help you understand why it matters and how to apply it in your everyday business.
What Is “Value of Supply”
The value of supply under GST is the amount on which tax is levied when you supply goods or services. The law says that if you are supplying to an unrelated person and the price you charge is the only consideration, then the value of the supply is that price.
For example, if someone pays you ₹100 for a service, and you have no special relationship with that person, and that ₹100 is the usual market rate, then ₹100 is your value of supply. But it doesn’t end there. The law also requires you to add certain costs and allows you to deduct certain discounts while calculating the final value.
What Must be Included in the Value of Supply?
When calculating the value of supply, you need to add certain components to the basic price. These include:
- Any taxes, duties, cesses, fees or charges under any law (other than GST) that are charged by the supplier and shown separately.
- Any amount which the supplier is liable to pay but which has been incurred by the recipient (for example, packaging, freight, or a cost that should have been paid by the supplier but was paid by the buyer).
- Incidental expenses related to the supply, such as packing, commission, or transport charges, are billed to the recipient.
- Late fees, interest or penalties related to delayed payment of consideration.
- Subsidies that are directly linked to the supply (except those provided by the central or state government).
Example: If you supply a machine for ₹1,00,000 and separately charge ₹2,000 for packaging, and the buyer also pays a ₹5,000 subsidy directly tied to that machine, the value of supply becomes ₹1,00,000 + ₹2,000 + ₹5,000 = ₹1,07,000.
What May be Excluded or Adjusted?
Some adjustments can reduce your taxable value. You may exclude:
- Discounts given before or at the time of supply, provided they are clearly mentioned in the invoice.
- Post-supply discounts are only available if they were agreed upon before the supply and the recipient reverses the related input tax credit.
When is the “Standard Price” Rule?
Sometimes, the normal transaction value rule doesn’t apply. For example, when you supply to related parties, or the payment isn’t entirely in money. In such cases, special valuation rules under GST come into play.
These situations include:
- Supplies between related parties (such as group companies).
- Supplies involving partly non-monetary consideration (like barter deals).
- Supplies made through an agent.
Rule 27: When the consideration is not entirely in money (for example, a barter), the value is determined by the open market value (OMV). If OMV isn’t available, then use the sum of money paid plus the equivalent value of the non-monetary part. If that’s not possible, use the value of similar goods or services, and if still unclear, use the cost or reasonable means methods (Rules 30 or 31).
Rule 28: For supplies between related persons (other than an agent), use the open market value or the value of similar goods. You may also choose 90% of the price charged by the recipient to an unrelated customer for the same goods.
Rule 29: For supplies made through an agent, use the open market value or 90% of the price charged by the agent to an unrelated party.
Rule 30: When the above rules can’t be applied, use 110% of the cost of production, acquisition, or provision.
Rule 31: If none of these methods work, use any reasonable means consistent with Section 15 of the CGST Act.
Example:
If Company A supplies goods to its subsidiary for ₹50,000 and the open market value of similar goods is ₹60,000, the value for GST purposes could be ₹60,000. Alternatively, if the company chooses, it can take 90% of that value (₹54,000). If the cost of production is ₹40,000, under the cost method, the value becomes ₹44,000 (110% of ₹40,000).
Why Valuation of Supply Matters?
Valuation plays a major role in GST compliance because:
- GST is levied on the value of supply. Under-declaring can attract penalties.
- Proper valuation ensures you claim accurate input tax credit (ITC).
- Most tax disputes arise from valuation errors, especially in related-party or barter transactions.
- Correct valuation builds transparency and trust during audits or assessments.
Step-by-Step Guide
Follow this quick checklist whenever you determine the value of a supply.
Step 1: Check the type of transaction
- If the transaction is between unrelated parties and the consideration is fully monetary, the value is the transaction value (the price actually paid or payable).
- If not, move to the special rules.
Step 2: Add what is required
Add the following to your base price:
- Other taxes or fees (except GST) are charged if applicable.
- Incidental expenses, packing, and commissions.
- Interest or penalties for late payment.
- Subsidies are directly linked to the supply.
Step 3: Subtract what is allowed
Deduct discounts that meet the legal conditions, those mentioned in the invoice or agreed upon in advance and supported by ITC reversal where needed.
Step 4: Apply special rules if needed
- For barter or partial cash transactions, apply Rule 27.
- For related parties or agent transactions, apply Rule 28 or 29.
- If no other method fits, use the cost method (Rule 30).
- If still unclear, use reasonable means (Rule 31).
Step 5: Keep proper documentation
Always maintain:
- Invoices and contracts.
- Cost sheets and valuation workings.
- Proof of discounts, subsidies, and open market values.
Common Mistakes to Avoid
- Treating invoice value as final without checking inclusions or exclusions.
- Ignoring the impact of non-monetary consideration.
- Forgetting to apply related-party valuation rules.
- Deducting post-supply discounts that don’t meet legal conditions.
- Failing to document the valuation method used.
Conclusion
Valuation under GST may sound technical, but it is simply about figuring out the true value of your goods or services for taxation. Start with the transaction value, then make the necessary additions or deductions. When dealing with related parties or non-cash payments, apply the special valuation rules carefully. By keeping clear records and understanding these basics, you will stay compliant, avoid penalties, and ensure smooth GST operations in your business. Once you get used to it, valuation becomes a simple and regular part of your accounting routine.
Related Services
