Value of supply between distinct and related persons (excluding Agents) under GST

Summary of Rule 28 of GST Rule 2017: Value of supply between distinct and related persons (excluding Agents)

A person who is under influence of another person is called a related person like members of the same family or subsidiaries of a group company etc.

Under GST law various categories of related persons have been specified and as relation may influence the price between two related persons therefore special valuation rule has been framed to arrive at the taxable value of transactions between related persons. In such cases following values have to be taken sequentially to determine the taxable value:

(i) Open Market Value.

(ii) Value of supply of like kind and quality.

(iii) Value of supply based on cost i.e. cost of supply plus 10% markup.

(iv) Value of supply determined by using reasonable means consistent with principles & general provisions of GST law. (Best Judgement method)

However, if the recipient is eligible for full input tax credit, the invoice value will be accepted as taxable value. It has also been provided that where the goods being supplied are intended for further supply as such be the recipient, the value shall, at the option of the supplier, be an amount equivalent to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his unrelated customer.

Example:

Taking our aforementioned example of related person under GST Law, let’s say that TATA Steel supplies goods worth Rs. 2,50,000 (which is the OMV of the goods) to TATA Motors for Rs. 2,00,000; and TATA Motors claims the full amount of GST charged in the invoice which is Rs. 36,000 (@18% of Rs. 2,00,000) as input tax credit, then this invoice value will hold true for valuation purpose. Eventually, when TATA Motors sell their products to their end consumers they will only get input credit of what was paid earlier as tax i.e. Rs. 36,000 (and not the tax that should have been paid if the goods were sold at OMV).

Therefore, the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services.

Section 25(4) and 25(5) of CGST Act covers those cases where same person has taken separate registration in different state or even in the same state.

Rule 28 of GST Rule 2017: Value of supply of goods or services or both between distinct or related persons, other than through an agent. –

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.