Valuation of Supply under GST – When Consideration is not Wholly in Money

Last Update Date : August 21, 2018

Valuation of goods and services is an important aspect which determines the amount of tax to be levied. If goods and services are undervalued, it leads to short-payment of tax, leading to non-compliance and resultant legal implications.

The situation is simple when price is the sole consideration of supply, and both the supplier and the recipient are not related. However, determining the value of supplies, when consideration is not in money is a different process. Let’s understand it in detail.
As a general principal, value of supply will be the amount of consideration received in money from the buyer. However, there can be cases when partial consideration is in money and the rest` is in kind. In such scenario, the value of supply shall be:

  • Method 1: Open Market Value of such supply.
  • Method 2: If the open market value is not available, the sum total of consideration in money and the monetary value of consideration not in money, if such monetary value is known at the time of supply.
  • Method 3: If the value cannot be determined by applying method 1 and 2, the value of supply of goods or/and services of like kind and quality will be considered.

Let us understand each of these metrics for deriving the value of supply with examples.

Open Market Value of Supply

Open market value of supply of goods or services is the full value in money, excluding the GST and cess payable by a person for a transaction.
Let us consider the example of a washing machine. A washing machine is supplied at Rs.25,000 for exchange with an old washing machine. If the price of the washing machine without exchange is Rs.30,000, then the open market value will be Rs.30,000, and hence, GST will be levied on this value.

Sum Total of Consideration in Money and the Monetary Value of Consideration not in Money

This method of valuation is applicable when the open market value of goods or services is not available. To arrive at the taxable value, the amount received in money is added with the monetary value of the products or services received as consideration.

Taxable Value = Consideration in Money + Monetary value of consideration not in money 

Example

Prestige Innovators supplied a new invertor AC to a loyal customer prior to its launch for Rs.45,000 along with an offer of exchanging an old AC. The value of the old AC at the time of supply was Rs.10,000, but the open market value of the invertor AC supplied is not available.
To arrive at the taxable value, Prestige Innovators cannot apply the transaction value as price is not the sole consideration. The open market value cannot be applied either as the market value is not available. In such a case, the taxable value will be the sum total of the consideration received in money plus the monetary value of the product or services received as consideration. Hence, the taxable value of supply of AC will be:

Consideration in money Rs 45,000 + Monetary Value of the AC Rs 10,000 = Rs 55,000

Value of Supply of Goods and/or Services of like Kind and Quality

This method is applicable when the open market value of the goods or services is not available and the value cannot be determined by applying the consideration in money and the monetary value of consideration not in money. In such a case, the value of supply of goods and/or services will be determined based on the prices of products of the ‘like kind and quality’ of the product being supplied. The value of products of ‘like kind and quality’ is determined by considering factors like the goods and services supplied should have the same characteristics, quality, quantity, functional components, materials, and reputation or it must closely or substantially resemble goods or services in question.

Example

Modern Technologies Ltd has introduced a new product ‘IOT-Universal Remote Organiser’ which is being offered to customers as part of the product promotion. In this case, as the product is being introduced for the first time, the value cannot be determined by applying the ‘Open Market Value’ method or by considering the ‘consideration in money and the monetary value of the consideration not in money’. In this case, to determine the value, the last method – comparing with a product of ‘like kind and quality’ can be applied.

Innovative Solutions has a product which is being sold at Rs.10,000, which has similar configuration and functionalities, and with additional USB port. Hence, the value of ‘IOT-Universal Remote organiser’ will be valued at Rs.10,000 for the purpose of tax assessment.

If for any reason the above method cannot be applied for determining the value of supply, it will be determined by applying the cost of the product+ 10 % or by using the residual method.

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