Valuation in GST, Valuation in Service tax and other Valuation Rules

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Valuation in GST: The Valuation under Central Excise law was very much complicated. Section 4 of the Central Excise Act dealt with valuation provisions and it provided that the duty should be paid on the Transaction value provided –

  • (a) Price is the sole consideration and
  • (b) assessee and the buyer are not related.

Section 4A – provided for valuation of excisable goods on a different basis – i.e. MRP basis. These provisions were very critical and difficult to understand. In respect of goods covered under Schedule III, tax was to be paid on MRP less specified abatement percentage. Such provisions were introduced in the year 1997 obviously to collect more revenue from branded goods.

Valuation based on Installed capacity –

Section 3A of the Central Excise Act had provisions relating to charging of excise duty on installed capacity. These provisions were made applicable for Pan Masala.

From the above analysis it can be summarized that there were different methods of valuation in Central Excise. Those were –

  • Transaction Value – Normally the selling price. Accepted only if the parties are not related and price was the sole consideration.
  • Tariff Rate – Instead of value, the duty was payable on UOM viz. Kgs, Meters etc.
  • MRP based valuation
  • Installed Capacity method.

The valuation issues were further made complicated due to provisions of Valuation Rules which prescribed different rules for cases which were not covered under the provisions of Section 4 referred above. The same are explained in brief

a) In case of transactions between related parties, the value was to be determined as per the value of goods for unrelated party. The definition of related party was to be carefully studied for ascertaining the applicability of this provision.

b) In case of removal of goods to depot, the price was to be adopted from the similar price of goods at depot at the time of removal.

c) In case of inter unit clearances, the price was to be adopted on Cost + 10% basis.In this case, interest was required to be paid on differential duty paid after finalization of value of inter unit clearances at the end of the financial year.

The issues involved in valuation were so complex that various litigations have taken place and Apex Court or High Courts have given landmark judgments in this respect. The various amendments that have been made in the law were on the basis of these judgments.

Valuation in Service tax –

In service tax also, the valuation was a complicated issue. As per the provisions of Sec. 67, where the service was provided for a consideration in money, then the service tax was to be charged on the value of such consideration for such service provided or to be provided. Thus, the total consideration received plus equivalent consideration not received in money was subject matter of service tax.

Service tax valuation in respect of Works Contract Service were much complicated. Works Contract service was bifurcated as Original Works and Maintenance work. Different rates were prescribed for these categories. There was alternative method of valuation in Works Contract Service and here actual value of service involved in the contract was to be determined and service tax was to be paid on that value. Further reverse charge provisions were applicable to this service which made the whole issue too complex.

Valuation in GST :

Section 15 (1) of the CGST Act deals with Valuation of goods and services. The basic provision is similar to earlier law – i.e. Tax to be paid on the Transaction Value.

Section 15 (2) provided for inclusion of items like Taxes, duties levied under any other law, Amount that the supplier is liable to pay, incidental expenses, interest or late fee, subsidies directly linked to the price etc.

Thus, similar to the earlier provisions, the transaction value is considered for value for the purpose of payment of tax for supply of goods and services. Also, the two conditions prescribed for this purpose are similar to the earlier provisions – i.e. price is the sole consideration and parties are not related.

However, in the sub-rule (d) and (e) of Sub Rule 2, two important changes are prescribed which provide for including interest, late fee, penalty for delayed payment and subsidies received linked to price as part of consideration for payment of tax. These provisions will have long term effect and there is a room for lapse on the part of tax payer. This provision seems to be unjustifiable, as the interest is a finance charge and hence it should not be a part of the consideration.

Also, subsidies are received at much later date from the date of supply. Hence, the tax payer has to keep watch on such payments received at a later date. Hence, these provisions are prone to litigation.

Valuation in respect of related parties and cases where price is not the sole consideration in GST –

Rule 27 and Rule 28 deal with Value of supply of goods or services where the consideration is not wholly in money and where supply is to a related party respectively. These rules provide that in such situation, the value shall be determined as under –

  • i) Open Market Value of such goods, or
  • ii) In absence of Open Market Value, the value equivalent to the consideration not received in money should be added to the Transaction Value, or
  • iii) Value of like goods or services, or
  • iv) If value cannot be determined by above methods, the same shall be determined as Cost + 10%.

There are two important proviso to these rules which are –

a) 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.

b) 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.

A careful reading of these provisions will indicate that the valuation rules in respect of transactions not covered under Section 15 are very dynamic and very simple to understand. In GST, a new concept of Open Market Value has been introduced which is easily understandable. The alternative options like value of Like goods or services is based on Customs valuation Rules and the same is also easily understandable. The last option given Cost + 10% basis in such situation which is similar to earlier provision in case of inter unit clearances.

These provisions have almost brought the valuation to Transaction Value even in case of Related Party transactions.

All these provisions have made the valuation provisions very simple and easy to understand for a common man.

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