In the GST framework, determining the taxable value of goods or services is an essential part of correct tax calculation. The GST will be levied and collected based on this taxable value. Usually, the value of supply is taken as the transaction value, which is the amount paid or the amount payable for the supply of goods or services between persons who are not related, and the price is the only consideration. To eliminate inequity and inconsistency, the Valuation Rules under GST (Rules 27-35 of the CGST Rules, 2017) incorporate various methods of arriving at the taxable value. These include open market value, cost-based valuation, and residual approaches that aim at ensuring the transparency and consistency of tax assessment across diverse business sectors.
What is The Valuation Rule Under GST?
Under GST, the term ‘valuation’ would mean any method for arriving at the taxable value of the goods or services covered under the levy of GST. Section 15 of the CGST Act, 2017, has thus defined the value of supply as the transaction value, which is the actual price paid or payable for the supply when the supplier and recipient are unrelated and when the price is the sole consideration.
The value of the transaction includes any ancillary expenditure for packing, commissions, and other incidental charges preceding delivery, in addition to any taxes, tariffs, and fees (other than GST), interest, late fees, and penalties for late payment. It does not include discounts, however, offered before or at the time of supply, provided they are appropriately supported on the bill.
In specific situations where the value cannot be ascertained through transaction value, the GST Valuation Rules, Rules 27-35 of the CGST Rules, 2017, will apply, which include methods like open market value, cost plus 10%, and the residual method. All of these allow for a very fair and consistent tax assessment across widely varied business environments.
Valuation Rule for Specific Businesses Under GST
The supply value under the GST framework in India is an important aspect of determining the tax liability. It normally uses the transaction value, defined as an invoice value, which is the amount that the buyer pays for the goods or services supplied. In view of the specific trading circumstances, this fundamental principle may not provide a fair or correct value in respect of certain kinds of businesses and transactions. Thus, the GST Valuation Rules, particularly Rules 27–35 of the CGST Rules, 2017, define special valuation methods applicable to certain entities and situations.
1. Valuation for Related or Distinct Persons (Rule 28)
When goods or services are supplied between related or distinct persons (for example, branches of the same company located in different states having different GST registrations), the consideration of valuation does not depend upon transaction value. The value shall be determined in the following manner:
- The open market value of the supply;
- If unavailable, the value of comparable goods or services;
- If neither option is available, the value can be estimated by Rule 30 (cost approach) or Rule 31 (residual technique)
- If the goods are wholly consumed by the recipient for further supply, the invoice value is considered to be the open market value if the recipient has full ITC.
This rule is particularly relevant to corporate groups, franchise systems, and interbranch transfers.
2. Valuation in Case of Supply Through an Agent (Rule 29)
The valuation when goods are supplied through an agent or to an agent can be:
- The open market value of the goods being supplied, or
- At the price at which the agent supplies goods of a similar kind and quality to unrelated parties,
- If neither is unavailable, basing on the cost plus method under Rule 30, or the residual method under Rule 31.
This applies to commission agents, consignment agents, and distributors acting on behalf of a principal.
3. Inventory Valuation Based on Cost (Rule 30)
- In the event that valuation cannot be determined under Rules 27-29, the value of supply shall be calculated as 110% of the cost of production or manufacture, acquisition, or provision of such goods or services.
- This is mainly used by manufacturers and service providers where there is no similar or open market value.
4. Residual Method of Valuation (Rule 31)
- If none of the preceding standards are applicable to determine valuation, the residual method allows a supplier to use reasonable methods in conformity with the principles and general provisions of GST valuation regulations.
- The supplier can directly apply this method if the other criteria are not applicable to services.
- This method is flexible and is used by companies in need of special or custom-made goods.
5. Valuation for Money Exchange, Foreign Currency Dealers, and Similar Businesses [Rule 32(2)]
There are two options for currency exchange operators or foreign exchange traders:
Option 1:
- The value is determined as a difference of the buying/selling rate and the RBI reference rate, multiplied by the total currency exchanged.
- If no RBI reference rate is available, the value will be considered to be 1% of the total amount of Indian Rupees received or exchanged.
- For foreign currencies, the value is determined by applying 1% on the lower amount of conversion to INR.
Option 2:
For dealers (optional): The value is calculated as a percentage of the gross currency transferred, in the manner outlined below:
- 1% of the gross amount for transactions up to ₹1,00,000 (minimum ₹250)
- Transactions up to ₹10,00,000: ₹1,000 + 0.5% on the amount exceeding ₹1,00,000 which is ₹5,500 plus 0.1% of the amount in excess of ₹10,00,000 with a maximum of ₹60,000.
This regulation applies to forex dealers, currency exchange operators, and licensed banking agents.
6. Valuation for Air Travel Agents [Rule 32(3)]
For air travel agents, the value of services for GST purposes is:
- 5% of the basic fare in the case of domestic bookings, and
- 10 percent of the basic fare in case of international bookings.
The basic fare means the portion of the airfare on which commission is normally paid to the agent by the airline. This simplified valuation method eliminates complications in determining the actual commission received.
7. Valuation of Life Insurance Business [Rule 32(4)]
Insurance companies often find it difficult to differentiate the risk premium from the investment premium. For this reason, the valuation of insurance companies is simplified to the following:
- If the entire premium is for risk coverage, the value gives the gross premium charged.
- If an investment or savings element is involved:
- Value of a policy = Investment amount indicated by the policyholder minus gross premium.
- In the case of single premium annuity policies, it is considered to be 10% of the premium charged.
This includes life insurers and insurance service providers.
8. Value for Second-hand Goods Dealers [Rule 32(5)]
In the case of suppliers of second-hand goods, the value of supply is calculated as the difference between the selling price and purchase price, assuming no input tax credit was used at the time of purchase. Where goods are recovered from a defaulted borrower (not registered under GST), the value is determined as the purchase price less 5% depreciation quarterly from the date of purchase up to the date of repossession.
This helps used car dealers, secondhand electronics merchants, and pawn shops due to the fact that tax will only be levied on the profit margin realised.
9. Value of Vouchers, Tokens, or Coupons [Rule 32(6)]
If it is possible to convert vouchers, tokens, or coupons into goods or services, then their valuation would depend on the monetary value of items that could be redeemed.
This includes companies offering gift cards, shopping vouchers, and organisations operating an incentive scheme.
10. Valuation in the Case of Pure Agent (Rule 33)
If the supplier incurs costs on behalf of the recipient as a pure agent, such expenses are excluded from the value of the supply, provided that:
- The supplier acts as a pure agent of the recipient,
- The payment is made on behalf of the recipient, and
- The recipient is the actual beneficiary of such incurred costs.
11. Interest, Late Fee, or Penalties for Delayed Payment (Rule 34)
Any interest, late fee, or penalty levied in connection with the late payment of consideration forms part of the value of the supply and is taxed correspondingly.
12. Valuation for Supplies Between Principal and Job Worker
No GST is payable during a transfer of goods between the principal and job worker or vice-versa when the job work conditions provided under Section 143 of the CGST Act are satisfied. If the job worker sells items directly, their value is considered on the open market value or similar type and quality.
Conclusion
The valuation provisions under GST for specific industries are essential in ensuring fairness, standardisation, and transparency in the determination of the taxable value of supplies. Since not all transactions follow the standard pricing model, these specialised valuation provisions meet the particular requirements of sectors such as foreign currency, air travel, insurance, second-hand goods, and agency services. In this respect, GST legislation at once minimises ambiguity and potential disputes by requiring that valuation be made openly and in a simplified manner, ensuring that every category of business complies with the law. In general, a structured framework of GST valuation standards enhances the precision of tax calculations and maintains consistent treatment across industries.
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