06. Value of Supply
This article is part of the book named " Comprehensive Guide to GST" authored by CA. Brijesh Thakar. You can access the full book on following link.
Definitions
Related persons as per explanation to section 15
Persons shall be deemed to be “related persons” if––
such persons are officers or directors of one another's businesses
such persons are legally recognized partners in business
such persons are employer and employee
any person directly or indirectly owns, controls or holds twenty-five percent or more of the outstanding voting stock or shares of both of them;
one of them directly or indirectly controls the other
both of them are directly or indirectly controlled by a third person
together they directly or indirectly control a third person; or
they are members of the same family
The term “person” also includes legal persons;
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.
Open market value
Open market value of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made. (Explanation to valuation rules)
Supply of goods or services or both of like kind and quality
means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both. (Explanation to valuation rules)
Organising State ( for valuation of lottery)
The expression ― Organising State has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010. (explanation to rule 31A)
Basic Understanding on Concept of Valuation
We have understood in chapter of levy and collection that-
In any taxation law, charge must be established clearly by a charging section. Four ingredients must be present to establish charge of tax. These ingredients are as under.
On what tax shall be levied (Transaction on which tax shall be levied)
On which value tax shall be levied (how to derive value on which tax is to be levied)
At what rate tax shall be levied
Who is a person liable to pay tax
The second question regarding the value on which tax needs to be paid is answered under section 9 of CGST Act and section 5 of IGST Act as – “ It shall be levied on the value to be determined as per section 15 of the CGST Act.” Hence, it becomes important to understand provisions of section 15 of the CGST Act.
Normally in a taxation law value on which tax is to be paid is transaction value. I.e. tax is imposed on the value at which transaction has been executed. Though this can be true in most of the cases, it may not be true for all cases. For example, in certain cases price may have been manipulated. i.e. either increased or decreased. Seller and buyer can be related parties and relationship may have influenced the price. In case the buyer and seller both are registered under GST and the GST paid on the price is eligible as input tax credit, the question of valuation shall not be of much significance as whatever GST is charged by the seller shall be available to buyer as input tax credit. Hence such transaction shall be revenue neutral. However, when the transaction is a B2C (Business to customer. i.e. sold to unregistered person) transaction or the ITC is not available to the buyer (due to section 17(5) or otherwise) then the question of valuation becomes important.
There are other issues also for determination of value. For example, whether certain ancillary activities like packing, loading etc shall be included in the value or not. What treatment needs to be given for post sales discount? Will it result in reduction in value of supply and consequently reduction in tax liability? Will interest charged for late payment be included in value of supply?
To get answers of all these questions, let us understand provisions of section 15 of the CGST Act. Following chart gives overview of provisions of section 15.
Commentary on section 15
As per section 15(1) of the CGST Act, “the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”
It is important to note that the provisions of section 15(1) will be applicable only when
supplier and recipient are not related and
price is the sole consideration
If any of the above conditions is violated, value of supply will not be determined under section 15(1) but it will be determined as per section 15 (4)
i.e. as per valuation rules.
Readers need to understand that merely because the buyer and seller are related persons, transaction value cannot be questioned. It is important that the relationship has influenced the price. For example if supplier who is relative of the recipient sells some goods at the same price at which he sells them to unrelated recipient then the transaction value shall be accepted as assessable value.
When in addition to the price, supplier is getting something else also from the recipient (whether monetary or non-monetary), the transaction value cannot be
accepted because here price is not the sole consideration. It is important to note that once section 15(1) fails, the value shall be determined under section 15(4). Section 15(1), 15(2) and 15(3) shall go hand in hand. Transaction value shall be accepted as assessable value after making adjustments under section 15(2) and section 15(3). Section 15(2) prescribes additions to be made in transaction value and section 15(3) prescribes exclusions from transaction value.
Let us understand section 15(2)
As per section 15(2) of CGST Act, following will be included in the value of supply.
Any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than Central Goods and Services Tax Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier. As evident, taxes charged under any other law shall except GST law shall be included in the value of supply. Question arose as to tax collected at source under Income Tax Act. Whether such TCS shall be included in the value of supply? It had been clarified by circular No.76/50/2018-GST dated 31-12-2018 that taxable value for the purpose of GST shall include the TCS amount collected under the provisions of Income tax Act,1961, once the value to be paid is inclusive of the said TCS. However, this circular is changed by CBIC afterwards and it was explained that TCS under Income Tax Act shall not be included in value for GST purpose because TCS is not a separate tax.
Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both. This is about the payment made by recipient on behalf of supplier. For example, Mr A supplies goods to Mr. B for Rs. 100,000/- . In addition to this amount Mr. B pays for raw material purchased by Mr A worth Rs. 10,000/-. This amount of Rs. 10,000/- shall be added in the value.
Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services. This clause has wider implications as it adds all incidental expenses charged by the supplier from
the recipient in respect of the supply. Here two things are important.
Amount charged must be in respect of the supply
Amount charged is for anything done by the supplier at the time of or before delivery of the goods or supply of service
Example: ABC Ltd. supplies some chemical to XYZ Ltd. for Rs. 100,000/-. XYZ Ltd. wishes to get the goods tested by ABC Ltd. in lab for some certification. ABC Ltd. charges Rs. 10,000/- for such testing from XYZ Ltd. and then delivers the goods.
Here the testing is done before delivery of the goods hence as per section 15(2)(c) this testing charges shall be added in the value of supply of goods.
Interest or late fee or penalty for delayed payment of any consideration for any supply.
Though interest paid for delayed payment of consideration is purely financial in nature and has more to do with non-receipt of consideration in time than the supply of goods or services, due to this clause, such interest or late fees or penalty shall also be added in the value of supply.
Here, question arises as to what will be the time of supply for such additional payment because at the time of supply of goods, person may not be aware of future receipt of such additional payment. Hence as per section 12(6), Time of supply for such additional consideration shall be the date on which the supplier receives such addition in value.
Illustration:
Mr. A sold goods worth Rs. 1,00,000/- to Mr. B on 20th January, 2022 on credit of one month. As per terms of the sale if payment is not received within a period of one month from the date of issue of invoice, interest at the rate of 15% per annum shall be charged. Mr. A receives payment of Rs. 1,00,000/- on 26th February, 2022. He demanded interest of Rs. 246 from Mr. B for delayed payment of consideration. Mr. B pays this interest on 15th March, 2022. Here time of supply for interest of Rs. 246 shall be the date on which this interest is received i.e 15th march, 2022
Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments. The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy. Subsidy shall be included in the value of supply only when following two conditions are satisfied:
Subsidy is directly linked to price and
Subsidy is not provided by Central or State Government.
Hence, if subsidy is not linked with the price or the subsidy is provided by central or state government then the same shall not be added in the value of supply.
Example
A company provides Rs. 5,000/- subsidy from its CSR fund to suppliers who supply solar roof tops to lower income groups. Here, this Rs. 5,000/- shall be added in the value of supply of solar roof top as per section 15(2)(e). Suppose, the supplier gets such subsidy from state government instead of a company then in such case the subsidy shall not be added in the value of supply of solar roof top as subsidy received from state or central government cannot be added in value of supply.
Let us now understand provisions of section 15(3)
As per section 15(3) the value of the supply shall not include any discount which is given
before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
after the supply has been effected, if—
such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
Commentary
Section 15(3) provides for reduction in the value of supply when a discount is given by the supplier to the recipient. In case the discount is given before or at the time of supply and it is recorded in the invoice, it shall result in reduction in the value of supply. However, in case the discount is given after the supply has been effected, it can be reduced from value of supply only if the discount is established as per agreement entered into at or before the time of supply and the recipient reverses the ITC taken by him in respect of the discount. The concept is simple, if the recipient has enjoyed the benefit of ITC then by way of discount liability of supplier cannot be reduced unless the recipient reverses the ITC taken. There cannot be double benefit given by revenue to supplier and recipient. Hence we can say that the reduction in GST liability of supplier is permitted only if there is a reversal of ITC by the recipient.
This reduction in GST liability is done by way of issuance of credit note. Here it is also important to understand concept of debit note and credit note with its time limit and consequences.
As per section 34(1), Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.
Time limit for issuance of such credit note is given under section 34(2): As per this section, any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:
Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.(This time limit is proposed to be extended till 30th Nov. By Finance Bill -2022)
It means such adjustment to tax liability is not permitted after end of September following the financial year in which the supply was made or the date of filing annual return whichever is earlier. For example, invoice is issued on 29th march, 2021, then adjustment in the GST liability cannot be made by issuance of credit note after September, 2021. Does that mean that the credit note cannot be issued after September, 2021? Answer is credit note can be issued anytime but if the period prescribed under section 34(2) is expired then GST liability cannot be adjusted. Those credit notes/debit notes which do not result in adjustment of GST liability are called financial credit notes/debit notes, wherein supplier and recipient adjust their internal payable/receivable amount but not GST liability.
Let us understand this concept with the help of following example:
A Ltd. Has appointed its dealer B & Co. A Ltd. Issued invoice for 1,000 units at a price of Rs. 100 per unit, total Rs. 1,00,000/- Applicable GST Rate 5%, hence GST charged is Rs. 5,000 [1,00,000*5%]. B & Co. took ITC of this Tax. As per terms of supply A Ltd. gave discount of Rs. 10,000 to B & Co. as payment is made within agreed period of 30 days. Now A Ltd. shall issue credit note of Rs. 10,000/- plus GST of 5% (Rs. 500) to B & Co. B & Co. in response shall issue debit note of same amount & shall reverse ITC of Rs. 500. In this situation GST liability of A Ltd. shall be reduced by Rs. 500 in the month of issuance of credit note.
However, if this discount is not as per the terms of agreement or B & Co. does not reverse ITC of Rs. 500 then A Ltd. cannot reduce its GST Liability. Further if time limit under section 34(2) has expired then also A ltd cannot reduce its GST liability.
In this situation financial debit note/credit note shall be issued having no mention of GST. Hence, A Ltd. shall issue credit note of Rs. 10,000/- without GST. And for B & co. this shall be discount income having no GST implications. In case of dealerships and agency business issuance of financial debit note/credit note (having no GST implications) is a common practice. Such financial debit note/credit note shall not be shown anywhere in GST returns as it does not have any GST implications. Further, because of such financial debit note/credit note, turnover as per GST Returns shall not match with the turnover as per Books of Accounts. Hence, it will become part of reconciliation statement in form GSTR- 9C.
*Circular No. 92/11/2019-GST dated 7th March, 2019 may be referred for above explanation.
Example: A Ltd. gives a discount of 30% on the list price to its distributors. List price of its product is Rs. 1000. Here after deducting discount of Rs. 300, taxable value of Rs. 700 will be arrived.
Example: A company announces turnover discounts after reviewing dealer performance during the year. The discounts are based on performance slabs and are given as cash back. As these discounts were not known at the time of supply of the goods, they will not be deducted from taxable value of those goods.
Example: Crunch Bakery Products Ltd sells biscuits and cakes through its dealers, to whom it charges the list price minus standard discount and pays GST accordingly. When goods remain unsold with the dealers, it offers additional discounts on the stock as an incentive to push the sales.
Can this additional discount be reduced from the price at which the goods were sold and concomitant tax adjustments made?
Answer: The discounts were not known or agreed at the time of supply of goods to the dealers. Therefore, such discounts cannot be reduced from the price on which tax had been paid in terms of section 15(3).
Example: Black and White Pvt. Ltd. has provided the following particulars relating to goods sold by it to Colorful Pvt. Ltd.
Particulars
Rs.
List price of the goods (exclusive of taxes and discounts)
50,000
Tax levied by Municipal Authority on the sale of such goods
5,000
CGST and SGST chargeable on the goods
10,440
Packing charges (not included in price above)
1,000
Black and White Pvt. Ltd. received Rs. 2,000/- as a subsidy from a NGO on sale of such goods.
The price of Rs. 50,000/- of the goods is after considering such subsidy.
Black and White Ltd. offers 2% discount on the list price of the goods which is recorded in the invoice for the goods. Determine the value of taxable supply made by Black and White Pvt. Ltd.
Answer Computation of Value of Taxable Supply
Particulars
Rs.
List price of the goods (exclusive of taxes and discounts)
50,000
Tax levied by Municipal Authority on the sale of such goods [Includible in the value as per section 15(2)(a)]
5,000
CGST and SGST chargeable on the goods
[Not includible in the value as per section 15(2)(a)]
-
Packing charges (includible in the value as per section 15(2)(c)]
1,000
Subsidy received from a non-Government body [Since subsidy is received from a non - Government body, the same is included] section 15(2)(e)]
2000
Total
58000
Less: Discount @ 2% on Rs. 50,000/- [Since discount is known at the time of supply, it is deductible from the value in term of section 15(3)(a)]
1000
Value of taxable supply
57000
Valuation Rules
As we have discussed earlier, the provisions of section 15(1) will be applicable only when
- supplier and recipient are not related and
- price is the sole consideration
If any of the above conditions is violated, value of supply will not be determined under section 15(1) but it will be determined as per section 15(4)
i.e. as per valuation rules. When in addition to the price, supplier is getting something else also from recipient (whether monetary or non-monetary), the transaction value cannot be accepted because here price is not the sole consideration. It is important to note that once section 15(1) fails, the value shall be determined under section 15(4). Section 15(1), 15(2) and 15(3) shall go hand in hand. When we are out of section 15(1), we will straightway be covered under to section 15(4).
List of valuation Rules are as under-
Rule 27 Value of supply of goods or services where the consideration is not wholly in money
Rule 28 Value of supply of goods or services or both between distinct or related persons, other than through an agent
Rule 29 Value of supply of goods made or received through an agent
Rule 30 Value of supply of goods or services or both based on cost
Rule 31 Residual method for determination of value of supply of goods or services or both
Rule 32 Determination of value in respect of certain supplies
Rule 33 Value of supply of services in case of pure agent
Rule 34 Rate of exchange of currency, other than Indian rupees, for determination of value
Rule 35 Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax
Rule 27 Value of supply of goods or services where the consideration is not wholly in money.
Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall-
be the open market value of such supply
if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply
if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality
if the value is not determinable under clause (a) or clause (b) or clause ©, be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order
Following two illustrations are given in the rule
Where a new phone is supplied for twenty thousand rupees along with the exchange of an old phone and if the price of the new phone without exchange is twenty four thousand rupees, the open market value of the new phone is twenty four thousand rupees.
Where a laptop is supplied for forty thousand rupees along with the barter of a printer that is manufactured by the recipient and the value of the printer known at the time of supply is four thousand rupees but the open market value of the laptop is not known, the value of the supply of the laptop is forty four thousand rupees.
Commentary
It is clear from the above rule that if the consideration is not wholly in money, first we need to try to find out open market value of the supply. Open market value of the supply means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made. Once, we conclude that it is not possible to find out such open market value of supply, we need to see the opposite side i.e what the supplier is receiving in monetary plus non-monetary terms. Here it is important that we have the value of non-monetary consideration involved. If this is also not possible, we need to find out value of supply of goods or services or both of like kind and quality. “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both. Lastly if such value is also not available then we need to leave rule 27 and determine value under rule 30 or 31 in that order. (Discussed later in this chapter)
Let us understand this rule with the help of following chart
Usually the new mobile phone is sold for Rs. 30,000/-.
Thus, here the open market value of the new phone is Rs. 30,000/-. Hence value of supply is Rs. 30,000/-.
Let's consider a different case consideration is paid partly in cash and partly in kind
In this case the Value of Supply would be Rs. 27,000+Rs. 2,000 = Rs. 29,000.
Rule 28 Value of supply of goods or services or both between distinct or related persons, other than through an agent.-
The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
be the open market value of such supply
if the open market value is not available, be the value of supply of goods or services of like kind and quality
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, in that order
Provided that 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 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
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.
Commentary
As per section 25(3) and section 25(4), when different registrations are taken under same PAN then such registered persons shall be called separate persons for GST. If there is a supply between such persons or if the persons are related then the valuation shall be done under this rule. Like Rule 27, here also first we need to find out open market value of the supply. If it is not available then value of such goods or services of like kind and quality. Similar to Rule 27, if this is not possible, Rule 30 or 31 shall be followed in that order.
Two provisos make Rule 28 different from Rule 27. As per first proviso, an option is given to the supplier to take value of his supply at 90 % of the price charged by the recipient from his customer who is not related person, for goods of like kind and quality. For example Mr. A sells goods to Mr. B who is his relative for Rs. 85. Mr. B sells these goods (or similar goods) to Mr. C who is non related to him for Rs. 100. Here, Mr A has option to value his supply made to Mr. B at Rs. 90 (90 % of Rs. 100- the price at which Mr. B sells these goods to Mr. C).
As we have discussed earlier also when full ITC is available to the recipient then question of valuation does not remain very significant. Hence, second proviso to this rule provides that when the recipient is eligible for full ITC then the value declared in invoice shall be accepted as open market value and question of relationship influencing the price shall not arise. For example, Mr. A sells goods at Rs. 65 to his relative Mr. B. Market value of the goods is Rs. 75. Mr. B is eligible for full ITC on purchase of such goods. In this case Rs. 65 (invoice value) shall be accepted as market value and no other adjustment shall be made in this value.
Rule 29 Value of supply of goods made or received through an agent.-The value of supply of goods between the principal and his agent shall-
be the open market value of the goods being supplied, or at the option of the supplier, be 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, where the goods are intended for further supply by the said recipient.
Illustration:
A principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of five thousand rupees per quintal on the day of the supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of four thousand five hundred and fifty rupees per quintal. The value of the supply made by the principal shall be four thousand five hundred and fifty rupees per quintal or where he exercises the option, the value shall be 90 percent of five thousand rupees i.e., four thousand five hundred rupees per quintal.
where the value of a supply is not determinable under clause (a), the same shall be determined by the application of Rule 30 or Rule 31 in that order. Provisions of Rule 29 is similar to that of Rule 28. When principal supplies goods to his agent the value shall either be the open market value or at the option of the principal 90% of the price at which agent supplies goods of like kind and quality to his unrelated customer.
Rule 30 Value of supply of goods or services or both based on cost.-
Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.
Commentary
Rule 30 shall be applied when it is not possible to determine value under Rule 27, Rule 28 and Rule 29. This rule provides for making valuation based on cost. As per this rule value of supply can be taken equivalent to 110 % of cost of production/acquisition or cost of provision of services. Question arises here as to how to determine such cost. No guidance is available in this rule about how to determine the cost. Guidance can be taken from erstwhile Rule 8 of central excise rule, which was similar to this rule. As per this rule cost of production shall be decided as per CAS-4 (Cost Accounting Standard-4).
Rule 31 Residual method for determination of value of supply of goods or services or both.
Where the value of supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:
Provided that in the case of supply of services, the supplier may opt for this rule, ignoring Rule 30.
Commentary
This Rule is a residual rule which provides that the value when cannot be determined by any of the preceding rules, it shall be determined using reasonable means consistent with the principles and general provisions of section 15. In case of valuation for provisions of services it is not mandatory to first go to Rule 30 and then to Rule 31. In case of valuation for provisions of services, directly Rule 31 can be applied ignoring Rule 30.
Valuation Rules Covering Specific Supplies
Rule 27 to Rule 31 were rules covering specific situations. Now let us check Rule 31A to Rule 34 covering specific supplies/supplier.
Rule 31A Value of supply in case of lottery, betting, gambling and horse racing-
As per this rule, value of lottery shall be deemed to be 100/128 of the face value of ticket or of the price as notified in the Official Gazette by the Organising State, whichever is higher
The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator
We have discussed taxability on actionable claims earlier. As per section 2(1) of the CGST Act, “actionable claims” shall have the same meaning as assigned to it in section 3 of Transfer of Properties Act, 1882.
As per section 3 of Transfer of Properties Act, 1882, Actionable claim” means a claim to any debt, other than-
- a debt secured by mortgage of immoveable property or
- by hypothecation or pledge of moveable property, or
- to any beneficial interest in moveable property not in the possession,
- either actual or constructive, of the claimant,
- which the Civil Courts recognise as affording grounds for relief,
- whether such debt or beneficial interest be existent, accruing, conditional or contingent.
In short, actionable claim is a claim or debt for which a person can take action i.e. he can reach to the court for recovery. Actionable claims for a layman represents an unsecured debt. For example, Mr. A needs to recover Rs. 15,000/- from Mr. B against sale of some goods. For Mr. A it is actionable claim.
GST on actionable claims
As per definition of Goods, actionable claims are included in the definition of Goods. Hence, we can say that actionable claims are Goods. However, clause 6 of schedule III Actionable Claims other than lottery, betting and gambling are neither supply of Goods nor supply of services. Hence we can say that actionable claims except Lottery, betting and gambling are not chargeable to GST due to applicability of Schedule III.
Hence, the valuation of lottery, betting, gambling etc are done as per Rule 31A. As per this rule, value of lottery shall be deemed to be 100/128 of the face value of ticket or of the price as notified in the Official Gazette by the Organising State, whichever is higher. The implied GST rate here is 28%. In case of betting, gambling etc value shall be determined as per Rule 31A (2) which provides that shall be 100% of the face value of the bet or the amount paid into the totalisator.
Readers need to Note that Rule 31A(3) has been stuck down by Honourable Karnataka High Court. Relevant portion of the judgement is reproduced below-
2021 (6) TMI 230 - KARNATAKA HIGH COURT
BANGALORE TURF CLUB LIMITED AND MYSORE RACE CLUB LIMITED VERSUS THE STATE OF KARNATAKA
In the case at hand, the amount that gets into the totalisator is not the prior determined face value of the entire bet, which is before the beginning of the race and exit of it from the totalisator after the race is over by paying the money to its last pie to the winner of the stake can neither be construed to be business, consideration, goods or supply as defined under the Act, as the amount that lies in the totalisator is only for a brief period which is held by the petitioners/Race Club in its fiduciary capacity. All that the petitioners would become liable for payment of tax under the Act is the commission that it receives for rendering service of holding the bet in the totalisator for a brief period in a fiduciary capacity. Though the Apex Court has considered what is actionable claim qua sale of a lottery ticket that would be inapplicable to the case at hand as the challenge before the Apex Court and the answer was on a different facts and circumstances. Therefore, the supply of an actionable claim as indicated in the Rule cannot include the entire amount brought into the totalisator.
The totalisator is brought under a taxable event without it being so defined under the Act nor power being conferred in terms of the charging section which renders the Rule being made beyond the provisions of the Act. The same follows to the impugned KSGST Rules which are identical to the impugned CGST Rules. Therefore, Rule 31A(3) which does not conform to the provisions of the Act will have to be held ultra vires the enabling Act and consequently opens itself for being struck down.
The issue is answered in favour of the petitioners striking down Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as being contrary to the CGST Act and hold that the petitioners are liable for payment of GST on the commission that they receive for the service that they render through the totalisator and not on the total amount collected in the totalisator - petition allowed.
Rule 32 Determination of value in respect of certain supplies
Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner provided hereinafter.
Purchase or sale of foreign currency, including money changing
In case where neither of the currencies exchanged is Indian Rupees, the value shall be equal to one per cent of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by the Reserve Bank of India. A person supplying the services may exercise the option to ascertain the value in terms of following table for a financial year and such option shall not be withdrawn during the remaining part of that financial year.
Value of Foreign Currency Exchange(In INR/Per Transaction)
Value of Supply As per Clause (b)
Up to Rs.1,00,000
1% of gross amount of currency exchanged subject to maximum of Rs.250.
Rs.1,00,001 to Rs.10,00,000
Rs.1000+ 0.50% of Gross amount of currency exchanged exceeding
Rs. 1,00,000 and upto 10,00,000.
Above Rs.10,00,000
Rs.5500+ 0.10% of Gross amount of currency exchanged exceeding Rs.10,00,000 subject to maximum amount of Rs.60,000.
Let's understand with an example:
EXIM Ltd. exported some goods to SUN Ltd. of USA. It received $9000 for consideration and;
Sold it for Rs. 44 per USD. RBI reference rate at that time is :
Rs. 45 per USD.
N/A
Converted into £4500. RBI reference rate at that time is :
Rs. 46 per USD.
Rs. 88 per UK Pound.
For case A:
For a currency, when exchanged from, or to INR, the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, the RBI reference rate or selling rate as the case may be, and the RBI reference rate for the currency at that time, multiplied by the total currency units.
Thus, the value of supply = (Rs.45-Rs.44) * $9,000 = Rs.9,000
When RBI reference rate is unavailable, the value shall be 1% of gross amount of Indian Rupees provided or received, by the person changing the money.
Thus, the value of supply = 1% of Rs. (44*9,000) = 1% of Rs. 3,96,000 = Rs. 3,960
For case B:
When neither of the currencies are exchanged in INR, the value shall be equal to 1% of lesser of two amounts the person changing the money would have received by converting any of the two currencies into INR on that day at the reference rate provided by RBI.
USD to INR = $9000*Rs.46 = Rs.414000
UK Pound to INR = £4500*Rs.88 = Rs.396000 Here lower = 396000 INR
Thus value of service = 1% of Rs. 3,96,000 = Rs. 3,960
Case 1 : Transaction where one of the currencies exchanged is Indian Rupees.
Example: On 10th May, Mr. Doshi converted USD $ 100 into Rs. 6,400 @ Rs. 64 per USD through Eastern Money Changers. RBI reference rate on 10th May for US $ is Rs. 63 per US $. The value of supply in this case is (Rs. 63 – Rs. 64)* $ 100 = Rs. 100 and GST will be levied on this amount. If the RBI reference rate is not available, then 1% of Rs. 6,400 i.e., Rs. 64 will be the value of supply of service
Case 2: Transaction where neither of the currencies exchanged is Indian Rupees.
Example: US $ 9,000 are converted into UK £ 4,500. RBI reference rate at that time for US $ is Rs. 63 per US dollar and for UK £ is Rs. 82 per UK Pound. In this case, neither of the currencies exchanged is Indian Rupee. Hence, in the given case, value of taxable service would be 1% of the lower of the following:
US dollar converted into Indian rupees = $ 9,000 × Rs. 63 = Rs. 5,67,000
UK pound converted into Indian rupees =£ 4,500 × Rs. 82 = Rs. 3,69,000
Value of taxable service = 1% of Rs. 3, 69,000 = Rs. 3,690
Example: Easy Coupons Ltd. sells coupons that are redeemable against specified luxury food products at retail outlets. Each coupon has a face value of Rs. 900 but is redeemable for supplies worth Rs. 1000.What is the value of supply of such coupon under GST laws?
Answer: In terms of rule 32(6) of the CGST Rules relating to valuation, the value of a coupon is the money value of the goods redeemable against it. Therefore, though the coupon is sold for Rs. 900, its value is Rs. 1000. In terms of rule 32(6) of the CGST Rules relating to valuation, the value of a coupon is the money value of the goods redeemable against it. Therefore, though the coupon is sold for Rs. 900, its value is Rs. 1000.
Example: Mr. X, a money changer, has exchanged US $ 10,000 to Indian rupees @ Rs. 64 per US $. Mr. X wants to value the supply in accordance with rule 32(2)(b) of CGST Rules.
Determine the value of supply made by Mr. X.
Answer: As per rule 32(2)(b) of CGST Rules, the value in relation to the supply of foreign currency, including money changing, is deemed to be-
1% of the gross amount of currency exchanged for an amount up to Rs. 1,00,000, subject to a minimum amount of Rs. 250;
Rs. 1,000 and 0.5% of the gross amount of currency exchanged for an amount exceeding Rs. 1,00,000 and up to Rs. 10,00,000. Therefore, the value of supply, made by Mr. X, under rule 32(2)(b) of CGST Rules is computed as under:
Particulars
Rs.
Rs.
Value of currency exchanged in Indian rupees [Rs. 64 x US $ 10,000]
6,40,000
Upto Rs. 1,00,000
1,000
For Rs. 5,40,000 [0.50% x Rs. 5,40,000]
2,700
Value of supply
3,700
Supply of services in relation to booking of tickets for travel by air provided by an air travel agent
Value of Supply
Domestic Bookings
5% of Basic Fare
International Bookings
10% 0f Basic Fare
The expression “basic fare” means that part of the air fare on which commission is normally paid to the air travel agent by the airline.
Let's understand with an example:
M/s. Indian Airlines sold tickets for transport of passengers to: Case-1: Delhi
Case-2: Singapore
During December, 2017 the total amount charged is Rs.30 Lakhs on the flight (100 tickets) of which Rs.10 Lakh is towards the passenger taxes. The airline pays commission @ 12.5% of the basic fare, which is equal to the total amount charged by the airline (net of govt. taxes), to an agent M/s. Udan Khatola who arranged the booking of the whole flight.
Here Basic Fare = Rs.30 Lakh – Rs.10 Lakh = Rs.20 Lakh Value of supply:
For Delhi = Rs.20Lakh*5% = Rs.1Lakh
For Singapore = Rs.20Lakh*10% = Rs.2Lakh
Supply of services in relation to Life Insurance Business
Provided that nothing contained in this sub-rule shall apply where the entire premium paid by the policy holder is only towards the risk cover in life insurance.
Let's understand with an example:
Beema Ltd. has the following policies :
Premium = Rs.10000, investment (intimidated in policy receipt) = 80%.
Single premium policy ; premium = Rs. 10,000/-
Miscellaneous policy ; premium = Rs.10,000/-
Only Risk Cover Policy ; premium = Rs.10,000/-
Here value of supply would be:
When the value of investment in savings is intimidated value of supply would be equal to premium less investment.
Thus value of supply = Rs.10000- Rs.8000 = Rs.2000.
In case of single premium policies value of supply would be equal 10% of premium.
Thus value of supply = Rs.10000*10% = Rs.1000.
In case of policies other than 1 , 2 and only risk covers the value of supply would be calculated as follows :
Year 1: 5% of premium
Thus value of supply = Rs. 10000*5% = Rs.500
Year 2: 12.5% of premium
Thus the value of supply = Rs. 10000*12.5% = Rs.1250
In case of only risk cover full premium would be considered as the value of supply
Thus the value of supply = Rs.10000
Taxable supply provided by a person dealing in buying and selling of second hand goods
The provisions of this sub rule can be opted only in following cases:
Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods.
No input tax credit has been availed on the purchase of such goods. If the above conditions are satisfied value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.
In case of Motor Vehicle value = Sale Price - Depreciated value as per Income Tax Act.
In case of repossession of goods
The purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.
The value of a token, or a voucher, or a coupon, or a stamp (other than postage stamp) which is redeemable against a supply of goods or services
The value of a token, or a voucher, or a coupon, or a stamp (other than postage stamp) which is redeemable against a supply of goods or services or both shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.
The Value of notified goods or services
The value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in section 25, where input tax credit is available, shall be deemed to be NIL.
Example: A company X Ltd, which deals in buying and selling of second hand cars, purchases a second hand Maruti Alto Car of March, 2014 make (Original price Rs. 5 Lakh) for Rs. 3 Lakh from an unregistered person and sells the same after minor refurbishing for Rs. 3,50,000/-. The supply of the car to the company for Rs.3 Lakh shall be exempted, and the supply of the same by the company to its customer for Rs.3.5 Lakh shall be taxed.
The value for GST purpose shall be Rs. 50,000/- i.e. the difference between the selling and the purchase price of the company. In case any other value is added by way of repair, refurbishing, reconditioning etc., the same shall also be added to the value of goods and be part of the margin.
If margin scheme is opted for a transaction of second hand goods, the person selling the car to the company shall not issue any taxable invoice and the company purchasing the car shall not claim any ITC.
Rule 33 Value of supply of services in case of pure agent
Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely-
the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorization by such recipient
the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account
Explanation - For the purposes of this rule, the expression “pure agent” means a person who-enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or bothneither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supplydoes not use for his own interest such goods or services so procured; andreceives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.
Example: A is an importer and B is a custom broker. A approaches B for customs clearance work in respect of an import consignment. The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter. So A, also authorises B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals.
Here, B is providing customs brokers service to A, which would be on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form part of value of customs broker service provided by B to A. This, in sum and substance is the relevance of the pure agent concept in GST.
Example: Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B.
Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies.
The fees charged by the Registrar of the Companies for registration and approval of the name are compulsorily levied on B.
A is merely acting as a pure agent in the payment of those fees.
Therefore, A's recovery of such expenses is a disbursement and not part of the value of supply made by A to B.
Example: Some examples of expenditure/costs incurred as pure agent are:
1. Port fees, port charges, custom duty, dock dues, transports charges etc. paid by customs broker on behalf of the owner of goods.
2. Expenses incurred by C&F agent and reimbursed by principal such as freight, godown charges.
Example: Suppose a customs broker issues an invoice for reimbursement of a few expenses and for consideration towards agency service rendered to an importer. The amounts charged by the customs broker are as below:
S. No.
Component charged in invoice
Amount
1
Agency income
Rs. 10,000
2
Traveling expenses; Hotel expenses
Rs. 15,000
3
Custom duty
Rs. 55,000
4
Docks dues
Rs. 5,000
In the above situation, agency income and travelling/hotel expenses shall be added for determining the value of supply by the custom broker whereas docks dues and the custom duty shall not be added to the value, provided the conditions of pure agent are satisfied.
Rule 34 Rate of exchange of currency, other than Indian rupees, for determination of value
The rate of exchange for determination of value of taxable goods shall be the applicable rate of exchange as notified by the Board under section 14 of the Customs Act, 1962 for the date of time of supply of such goods in terms of section 12 of the Act.
The rate of exchange for determination of value of taxable services shall be the applicable rate of exchange determined as per the generally accepted accounting principles for the date of time of supply of such services in terms of section 13 of the Act.
Rule 35 Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax
Where the value of supply is inclusive of integrated tax or, as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, namely-
Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) ÷ (100 + sum of tax rates, as applicable, in %)
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