The value of supply in a free market transactions where the two parties (i.e. buyer and seller) involved in a transaction are not related would be at arms-length or fair market value. However, when a commercial transaction happens between two related parties under GST, the value of supply could be distorted leading to lower GST payable to the Government. To prevent under invoicing or distortion of value of supply amongst related party, the Value of Supply rules provide guidelines for valuation of goods or services.
Under GST, related parties are:
Under GST, the term “related parties” also includes legal persons and persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, of the other. Further, related parties is also referred to as related persons or distinct persons under GST.
Under GST Act it is clearly mentioned that:
It’s important to consider two rules defined in the rules for determination of value of supply, while calculating the value of supply between related parties.
In a lot of related party transaction, the consideration for the value of supply of goods and/or services might not be paid wholly in money. Hence, its important to ensure that in all related party transactions, the rules concerning value of supply where the consideration is not wholly in money, is followed.
When the supply of goods or services is for a consideration not wholly in money, then value of the supply should be calculated as:
Where the value of a supply of goods or services or both is not determinable by any of rules prescribed in the procedure for determining value of supply under GST, the value should be taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.
The value of the supply of goods or services or both between distinct persons or related parties, other than where the supply is made through an agent, should be calculated as:
Business entities have an additional burden to identify all the transactions between the related persons and distinct establishments. The valuation is the confusing part and matter of importance when it comes down to supply to related persons.
Steps for the process is as follows:
For the transactions where receiver is not eligible for input tax credit for taxable supply of goods/services to related/distinct entities. For those transactions, value of supply of goods and services must be determined based on open market value and invoice should be raised along with taxes and shall be accounted as a third-party transaction. For all your GST related queries, enlist the aid of the experts at H&R Block India.