Valuation of Supply for GST

Bio

Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.

  • 5 Nov 24
  • 9 mins
value of supply under gst

Valuation of Supply for GST

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avatar of ankit rahangdale Ankit Rahangdale
  • 08 Mins
  • 05-11-24

Key Takeaways

  • The value of supply under GST includes additional costs like taxes, duties, and fees, beyond the base price of goods or services.
  • Components like incidental costs, recipient-incurred expenses, and penalties for late payments must also be factored into the supply value.
  • Different methods—transaction value, comparative, computed, and residual methods—are available for calculating supply value under GST.
  • The valuation method depends on specific criteria, such as whether the supply involves related persons, agents, or monetary and non-monetary considerations.
  • Accurate supply valuation is crucial for legal compliance, optimizing input tax credits, and ensuring proper financial reporting.

The value of supply under GST can be calculated in multiple ways. Each method varies based on the elements considered in the method. However, additional costs that a supplier incurs to supply goods and services to a recipient need inclusion in the supply value determination. Learn the factors that you need to include in the valuation of supply for GST in this detailed guide.

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What Is Included in the Value of Supply for GST? 

The following are the components that need to be included in the value of supply for GST:

Taxes, Duties, Fees, Charges and Cesses

The value of supply needs to include all taxes, cesses, duties and fees other than CGST, SGST, UGST and GST cess.

Amount Spent by the Recipient on the Supplier’s Behalf

The value of taxable supplies needs to include all costs associated with a supply that the supplier has to pay. A supply might include additional costs which need to be included in the value of taxable supply.

Incidental Costs and the Total Sum Charged for Pre-delivery Activities

Here are the incidental expenses that need to be included in the value of supply:

  • When a supplier reimburses a commission collected from the recipient for provisions of goods or services, it is a portion of a taxable supply.
  • If the invoice received by a supply recipient contains fees for certificates or inspection as additional components, it needs to be included in the value of the supply.
  • When a supplier charges a recipient for packaging, there needs to be a deduction of the cost from the supply’s value.
  • If a supplier pays transportation and delivery charges for goods supplied to a recipient, the freight charges need to be deducted from the supply value.

Subsidies

Excluding subsidies provided by the Central and State Governments, all other subsidies connected to a supply need inclusion in the supply’s value.

Late Fees for Payments

The value of supply should include interest, late fees and penalties for delayed payment receipts associated with the exchange of goods and services.

Example of Supply Valuation Under GST

Here is an example of supply valuation under GST, considering components like insurance, freight, pre-supply discounts and GST:

ComponentsDetails
Product price₹10,000
Add: Insurance₹500
Add: Freight₹1,000
Less: Pre-supply discount₹500
Total transaction value₹11,000
Applicable GST rate18%
GST amount₹1,980
Final value of the supply₹12,980
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Importance of Supply Valuation

Here is why supply valuation is important:

  1. Accurate Tax Calculation: Supply valuation helps charge the accurate amount of GST that a registered taxpayer needs to pay.
  2. Legal Compliance: Valuation of supply helps taxpayers comply with GST laws while avoiding penalties for delayed tax payments.
  3. Optimise ITC (Input Tax Credit): Supply value determination helps suppliers claim appropriate input tax credits.
  4. Pricing Strategy: Supply valuation influences the pricing strategies of suppliers, increasing market competitiveness.
  5. Transparency: Transparency in financial reporting and transactions is one of the important reasons to undertake supply valuation.
  6. Financial Planning: With an accurate valuation of supplies, suppliers can perform accurate financial forecasting and planning.

How Is Supply Value Calculated?

The table below illustrates the method of calculating the supply value:

MethodDescription
Transaction valueDepends on the actual price paid or payable
Comparative methodValue is determined based on supplies under similar conditions
Computed value methodIncludes the cost of production and profit margin
Residual methodReasonable means consistent with principles and general provisions
Inclusion of additional costsAll supply-related charges need to be included in this method
Exclusion of GSTExcludes GST components from valuation

Valuation of Supply Using Cost Method

Here are the components used in calculating supply value with the cost method:

ComponentDescription
Production costDirect and indirect costs incurred to produce goods
Profit marginReasonable profit margin based on industry standards
Add: Overhead expensesGeneral administrative expenses
Add: Distribution costsDelivery and distribution costs
Less: Any discountPre-supply discounts
Final value of the supplySum of all costs and profit margin
ApplicabilityWhen transaction value cannot be estimated beforehand

Valuation of Supply Using Residual Method

The following table depicts the supply value calculation with the residual method:

ComponentDescription
Reasonable meansCalculated using reasonable means consistent with principles
ComparisonIncludes a comparison between similar supplies
Industry standardsConsiders industry standards and practices
Add: Additional chargesCharges not included in the method
Regulatory guidanceAdherence to regulations set by the GST authorities
Final value of the supplyAggregate of all applicable factors
ApplicabilityWhen it is not feasible to use an alternative method

How to Calculate Supply Valuation for GST?

Here is how you can calculate supply valuation for GST:

StepDescription
Identification of transaction valueCalculate the price paid or payable
Include additional costsAdd taxes, cesses, duties and fees excluding GST and GST cess
Deduct discountsDeduct discounts before the time of supply
Add: Supplier’s liabilityAdd the amount paid by the recipient however incurred by the supplier
Apply GST rateApply the applicable GST rate
Derive the GST amountAdd: GST amount
Final valueDerive the total value after adjustments

CGST Rules Related to Supply Valuation

When it is not possible to assess the supply value under Section 15 as the price is not the sole consideration, the CGST Rules, 2017 apply. Here is how the value of supply needs to be treated:

  1. Open Market Value: It considers transactions that are entirely monetary, but might not include GST payable for the transaction. This method needs to be applied when the provider and recipient exhibit no relation and the price is the only consideration.
  2. Supply of Services and Goods of Like Kind and Quality: When there are similarities in quantities, qualities, functional aspects, materials and reputation between goods and services supplied, this method is applicable.

The following are the rules for supply valuation:

Rule 27: When the Consideration Is Not Entirely in Money

The value of supply is

  • Open market value
  • The complete consideration in money and any additional amount in money which is not equal to consideration in money if the open market value is unavailable
  • For the supply of similar goods and services, when it is not possible to determine the value of supply using the above-mentioned criteria
  • It includes money and money equivalent to the non-monetary consideration, in addition to a 10% markup.
  • Alternative reasonable techniques in accordance with Rule 31

Rule 28: When Supply Is Between Distinct or Related Persons Other than an Agent

When the open market value is unavailable, but the supplier and recipient are related, the following rules apply:

  • The supply value of similar goods and services when supplied by an agent
  • When the supply value is difficult to determine using the aforesaid criteria, regulations 30 or 31 apply.
  • If the recipient supplies goods and services, the supplier can choose to claim 90% of the amount that the recipient charged his/her unaffiliated clients as the value of commodities.

Rule 29: Supply Is Made Through an Agent

If the supply is made through an agent, the following rules apply for supply value determination:

  • Open market value of commodities
  • The supplier can deduct 90% of the price that the recipient charged him/her for the supply of similar products from his unaffiliated clients.
  • However, if the criteria mentioned above are not applicable, regulations 30 or 31 apply.

Rule 30: If you cannot determine the supply value using rules 27, 28 and 29, rule 30 applies. The rule states that the value is 110% of production costs, cost of acquisition or the price of rendering such services. Service providers can, however, implement Rule 30 to consider Rule 31.

Rule 31: When you cannot determine the supply value using Rules 27 to 30, you need to consider Rule 31 and the rules of Section 15 followed by the chapters’ provisions of reasonable methods.

Conclusion

The value of supply under GST can be calculated using the comparative method, computed value method and residual method. A common factor in all the aforesaid methods is the inclusion of additional costs and charges to determine the value of the supply of goods and services.

Ensure you consider the components accurately based on the method of supply value calculation in order to avoid penalties. This will further ensure business compliance with GST rules and regulations.

FAQs

What is valuation rule 30 under GST?

Rule 30 applies when the value of supply cannot be determined using prior rules (Rules 27 to 29). It stipulates that the supply value should be 110% of the cost of production, acquisition, or provision of services, providing a standardized way to calculate value when other methods are not feasible.

What is rule 29 of valuation under GST?

Rule 29 applies when the supply is made through an agent, allowing the valuation to be based on the open market value or 90% of the price charged by the recipient to an unrelated customer. This rule is useful for supplies where agents handle transactions on behalf of suppliers.

What is rule 27 of valuation under GST?

Rule 27 is used when the consideration is not entirely in money, meaning the supply includes non-monetary exchanges. The rule values supply at open market value or the sum of monetary consideration and equivalent non-monetary consideration, ensuring an accurate valuation despite partial non-cash payment.

What is valuation of supply under GST section?

Valuation of supply under Section 15 of the GST Act outlines how to determine the taxable value of goods and services, including considerations like transaction value, additional costs, and discounts. This section forms the foundation for calculating tax, ensuring consistency and accuracy in GST obligations.

What is the rule 28 of GST valuation rules?

Rule 28 governs supplies between related persons or distinct entities, such as between branches of the same company. The rule allows the valuation based on open market value or 90% of the price the recipient charges to an unrelated customer if the supply is further supplied.

What is rule 35 of the GST valuation rules?

Rule 35 specifies that the value of supply should exclude the GST amount itself, meaning that the GST is calculated on the net supply value. This prevents tax from being calculated on a tax-inclusive amount, ensuring a clear separation between taxable value and the tax applied.

What is rule 34 of GST valuation rules?

Rule 34 deals with the value of supply in cases where the transaction involves foreign currency. It specifies that the value of supply should be converted into Indian currency based on the Reserve Bank of India’s (RBI) exchange rate on the date when the supply becomes taxable. This rule ensures consistent currency conversion for GST valuation in cross-border transactions.







About the author
Ankit Rahangdale

Ankit Rahangdale

Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.

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