Home List Manuals GSTGST Ready ReckonerGST - Valuation / Value of Supply This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
Value of supply of goods or services or both between distinct or related persons, other than through an agent [Rule 28 of CGST Rules] - GST Ready Reckoner - GSTExtract Value of supply of goods or services or both between distinct or related persons, other than through an agent [ Rule 28 of the GST Rules ] Determination value of the supply between distinct persons as specified in u/s 25(4) and (5) or where the supplier and recipient are related, other than through an agent [ Rule 28(1) of the GST Rules of CGST Rules ] 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. [ Rule 28(1) ] In such cases following values have to be taken sequentially to determine the taxable value: - (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 of CGST Rules , in that order: (i) Value of supply based on cost i.e. cost of supply plus 10% mark-up (ii) Value of supply determined by using reasonable means consistent with principles general provisions of GST law. (Best Judgement method) 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 90% 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. 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. Open Market Value means the full value in money excluding taxes under GST laws , payable by a person to obtain such supply at the time when supply being valued is made, provided such supply is between unrelated persons and price is the sole consideration for such supply. [ Explanation (a) under rule 35 of CGST Act ] Supply of like kind quality means any other supply made under similar circumstances that is same or closely resembles in respect of characteristics, quality, quantity, functionality, reputation to the supply being valued. [ Explanation (b) under rule 35 of CGST Act ] The value of supply of services by a supplier to a recipient who is a related person, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient , shall be deemed to be (a) 1% of such guarantee offered, or (b) the actual consideration, whichever is higher. ( w.e.f. 26.10.2023 ) [ Rule 28(1) of the GST Rules of CGST Rules ] Relevant Important Point 1. Clarification on issues pertaining to taxability of personal guarantee and corporate guarantee [ Circular No. 204/16/2023-GST Dated 27.10.2023 ] Taxability of activity of providing personal bank guarantee by Directors to banks for securing credit facilities for the company without any consideration. The director and the company are to be treated as related persons. [ Explanation of (a) of section 15 ] Supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. [ Section 7(1)(c) r/w para 2 of schedule I ] Accordingly, the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service , even when made without consideration. Determination of value of supply - In terms of Rule 28 of CGST Rules , the taxable value of such supply of service shall be the open market value of such supply. Accordingly, as per mandate provided by RBI in terms of Para 2.2.9 (C) of RBI s Circular No. RBI/2021-22/121 dated 9th November, 2021, no consideration by way of commission, brokerage fees or any other form, can be paid to the director by the company, directly or indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits. No consideration to be paid in any manner, Directly or Indirectly As such, when no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. Accordingly, the open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero . In such a scenario, no tax is payable on such supply of service by the director to the company Consideration to be paid in any manner, Directly or Indirectly In cases where the director, who had provided the guarantee, is no longer connected with the management but continuance of his guarantee is considered essential because the new management's guarantee is either not available or is found inadequate, or there may be other exceptional cases where the promoters, existing directors, other managerial personnel, and shareholders of borrowing concerns are paid remuneration/ consideration in any manner, directly or indirectly. In all these cases, the taxable value of such supply of service shall be the remuneration/ consideration provided to such a person/ guarantor by the company, directly or indirectly. Taxability and valuation of the activity of providing corporate guarantee by a related person to banks/financial institutions for another related person, as well as by a holding company in order to secure credit facilities for its subsidiary company without any consideration. Where the corporate guarantee is provided by a company to the bank/financial institutions a holding company, for its subsidiary company, those two entities also fall under the category of related persons , a holding company to the bank/financial institutions for securing credit facilities for its subsidiary company, even when made without any consideration The activity is to be treated as a supply of services between related parties even made without any consideration [ Section 7(1)(c) r/w para 2 of schedule I ] It is clarified that the rule 28(2) shall not apply in respect of the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies and the same shall be valued in the manner provided in S. No. (1) of the circular no. 204/16/203 . In such case, the taxable value of supply will be determined as per rule 28(2) irrespective of whether of full ITC is available to the recipient of services or not. (a) 1% of such guarantee offered, or (b) the actual consideration, whichever is higher. Case Law IN RE: M/S. KANSAI NEROLAC PAINTS LTD.( 2019 (6) TMI 1108 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA ) The applicant can apply Rule 28 of the GST Rules, 2017 to determine the value of supply of goods for supply of goods by one distinct entity (factory/depot) as defined u/s 25(4) of the CGST Act to another entity having the same PAN (factory/depot). Examples Example 1:- Bangalore unit has appointed M/s Equilibrium sales as its sole agent. M/s Equilibrium sale sell the electronic goods of Bangalore unit under issued in its own name. the Bangalore unit transferred the goods costing ₹ 7,75,000/- to M/s Equilibrium sales on 20th October which were sold by M/s Equilibrium sales on 31st October at ₹ 7,65,000/- on 20th October, another electronic goods manufacturer supplied the goods of like kind and quality to M/s Equilibrium sales as the one supplied by the Bangalore unit at a price ₹ 7,75,000/-. In this case, As per clause (c) of explanation of related person to section 15 persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related. As per section 7(1)(c) read with schedule I, Supply of goods between related person made in the course or furtherance of business qualifies as supply even if made without consideration. Value of supply of goods shall be determined as per rule 28 of CGST Rules, Open market value of goods not available in the given case, since M/s Equilibrium sales is not eligible for full input tax credit, value declared in the invoice cannot be deemed to be the open market value of the goods. since M/s Equilibrium sales further supplies the goods , value of goods will be lower of: (i) the value of supply of goods or services of like kind and quality i.e. 7,75,000/- or (ii) 90% 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 i.e. ₹6,88,000 [₹ 7,65,000 x 90%] The value of supply, in the given case, will be ₹ 6,68,000/- Example 2:- A Pharma Company supplies drug intermediate to its own unit in another state for conversion into formulations. the product is exclusive to this company and there is no market sale in India of this drug intermediate. goods of like kind and quality are also not available. In this case , the supply is made to a distinct person, the same will be valued in accordance with rule 28 of CGST rules relating to valuation. there is no open market value of the drug intermediate as also there are no like goods. therefore, value of supply of such drug intermediate will be determine in terms of clause (c) of rule 28 of CGST Rules i.e. by using rule 30 of CGST Rules. Thus the value of supply of such drug intermediate will be 110% of its cost of production or manufacture.
|