Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services across India. One of the most critical aspects under GST is the determination of the value of supply, as the tax liability is computed on this basis. Section 15 of the Central Goods and Services Tax (CGST) Act, 2017, provides the legal framework for valuation under GST. According to this section, the value of supply generally refers to the transaction value, meaning the price actually paid or payable for the supply of goods or services.
Accurate valuation is essential because any discrepancy in determining the correct value may lead to either underpayment or overpayment of tax, triggering compliance issues or financial loss. The GST valuation framework aims to establish a fair, transparent, and uniform method for calculating the taxable value, aligning with existing tax principles such as those under central excise and service tax, while also incorporating customs valuation concepts for market value assessment.
Transaction Value and Its Conditions
The transaction value is the most preferred and primary method of valuation under GST. It is the price agreed upon between the supplier and recipient for the supply of goods or services. However, its adoption is subject to two important conditions:
- The supplier and the recipient must not be related persons. This ensures that the pricing is unbiased and reflects an arm’s length transaction.
- The price charged must be the sole consideration for the supply, without any other additional consideration affecting the valuation.
If either of these conditions is not met, the transaction value cannot be relied upon for valuation. In such cases, the value must be determined as per alternate methods laid down under the CGST Rules, specifically Rules 27 to 35, which provide a structured hierarchy of methods to be applied when transaction value is not suitable.
Moreover, the government has the authority to notify specific supplies and prescribe alternative valuation methods for those supplies, based on recommendations from the GST Council. This flexibility allows the tax system to adapt to complex or unique scenarios that might not fit within the standard valuation framework.
The Role of Related Persons in GST Valuation
A key concept influencing valuation under GST is the relationship between the supplier and recipient. Related persons may have an inherent connection that influences pricing, which could result in values not reflecting fair market prices. Recognizing such relationships helps prevent manipulation of transaction values to reduce tax liability.
While Section 2 of the CGST Act defines several terms, it does not explicitly define ‘related persons.’ Instead, this term is clarified in the Explanation to Section 15. It enumerates various circumstances where persons are deemed related, aiming to capture a wide spectrum of relationships.
Criteria for Related Persons
Persons will be considered related if any of the following conditions apply:
- They hold positions such as officers or directors in each other’s businesses, reflecting a level of control or influence.
- They are legally recognized business partners sharing joint interests in the business.
- There exists an employer-employee relationship, which can impact pricing decisions.
- One person directly or indirectly owns or controls 25% or more of the voting stock or shares in both parties, indicating significant influence.
- One person exercises direct or indirect control over the other, affecting commercial decisions.
- Both parties are controlled directly or indirectly by a third person, indicating common control.
- Together, both parties jointly control a third person, implying a linked business interest.
- They belong to the same family, capturing familial business arrangements.
These criteria aim to comprehensively cover all relevant business and personal relationships that might influence pricing.
Inclusion of Legal Persons
The term ‘person’ is broadly interpreted to include legal entities such as companies, firms, and other organizations. This inclusion ensures that related party rules are not limited to individuals but extend to corporate structures where ownership and control may exist.
Business Associations as Related Persons
Additionally, persons associated in business relationships where one acts as the sole agent, sole distributor, or sole concessionaire of the other are considered related. This ensures that exclusive business arrangements which may affect pricing are appropriately identified.
Importance of Identifying Related Persons
Correctly identifying whether parties are related is crucial because it determines the method of valuation to be applied. Transactions between unrelated persons are generally valued on the transaction value basis. However, when related parties are involved, tax authorities may scrutinize the value to ensure it represents an arm’s length price and is not artificially low or high to reduce tax.
Valuation Rules for Supplies Between Related or Distinct Persons
The CGST Rules provide specific provisions for valuation in the context of supplies between related or distinct persons.
- Supplies not made through an agent: Valuation must be carried out in accordance with Rule 28. This rule lays down a framework for determining value when the supply occurs between related persons or distinct persons, ensuring fair value is assigned.
- Supplies made through an agent: Valuation must follow Rule 29, which covers situations where the supply is routed through an agent. This rule aims to capture the value that the supplier would have received, accounting for the agent’s role.
These rules serve to prevent tax evasion by ensuring that transfers or sales between related entities are valued in a manner consistent with market prices.
Understanding Distinct Persons
Under GST, related persons may be distinct persons if they operate separate business establishments. For example, a company and its branch office or warehouse may be treated as distinct persons. Supplies between such distinct persons are taxable, and valuation must comply with the GST valuation norms to ensure appropriate tax liability.
Role of Agents in Valuation
When supplies occur through agents, the transaction value may not represent the actual consideration received by the supplier, as the agent may add a margin or commission. Rule 29 requires the value to be determined based on the price charged by the supplier to the agent, or the price the agent charges the recipient, whichever is relevant, ensuring correct valuation for tax purposes.
Challenges in Applying Valuation Rules Between Related Persons
Valuation between related parties often presents practical difficulties. Establishing an arm’s length price requires detailed documentation and sometimes, benchmarking against market prices. Complex corporate structures, inter-company transactions, and non-monetary consideration further complicate valuation.
Tax authorities may demand justification for the declared value, including transfer pricing studies or comparable market data. Businesses must maintain transparent records and ensure compliance with valuation norms to avoid disputes.
Practical Issues in GST Valuation and Inclusions and Exclusions from Transaction Value
Accurate valuation under GST is essential for ensuring correct tax liability and compliance. However, in practice, several challenges arise that complicate the determination of the value of supply. Apart from identifying related persons and applying transaction value, businesses face difficulties regarding inclusions and exclusions from the transaction value and handling complex pricing scenarios.
Delves into the practical issues encountered in GST valuation and elaborates on what should be included or excluded when calculating the transaction value, based on the provisions of Section 15 of the CGST Act and relevant rules.
Practical Challenges in GST Valuation
One of the primary challenges in GST valuation is determining whether the supplier and recipient are related persons, especially in cases involving complex corporate structures or indirect ownership. With holding companies, subsidiaries, joint ventures, and sister concerns, relationships can be layered and indirect, requiring careful analysis.
Another common difficulty is in verifying whether the price charged is the sole consideration. Many transactions involve bundled supplies, barter arrangements, or supply chains where consideration may not be strictly monetary or may be linked to multiple components, making valuation complex.
Promotional schemes, discounts, and freebies further complicate valuation. Distinguishing between a genuine discount and a price adjustment or separating the value of free goods from paid goods requires precise understanding and documentation. Failure to properly account for these can result in incorrect tax calculations.
In practice, suppliers often struggle with documentation requirements. Section 15(3) requires documentation supporting any discount or rebate excluded from the value. Without proper documentation like credit notes or agreements, tax authorities may disallow such exclusions.
Determining value for supplies involving non-monetary consideration also poses challenges. When supply is made in exchange for goods or services instead of money, valuation must be based on the open market value, but finding reliable market benchmarks may be difficult.
Finally, valuation of composite or mixed supplies, where multiple goods or services are bundled together, involves deciding the principal supply or segregating values. This affects the applicable GST rate and tax base, requiring clear classification and valuation methods.
Inclusions in Transaction Value
Section 15(2) of the CGST Act and Rule 31 of the CGST Rules specify amounts that must be included in the transaction value for valuation under GST, subject to conditions.
The transaction value includes:
- Any taxes, duties, fees, and charges, excluding GST, that the supplier is required to pay to the government, whether directly or indirectly, on the supply of goods or services. Examples include excise duty, entry tax, and value-added tax. These charges must be included if they are charged separately by the supplier.
- Costs of materials, components, parts, and other goods supplied by the recipient, directly or indirectly, free of cost or at a concessional rate, which are used in producing the supplied goods or services. The value of these inputs is added to the transaction value.
- The cost of any services or facilities supplied by the recipient free or at reduced cost and used in providing the supply. For instance, if the recipient provides transportation or installation services for free, their value is added to the transaction value.
- Royalties and license fees related to the supply. If the supplier has to pay a royalty or license fee, this amount is included in the transaction value, even if paid separately or by a third party.
- Incidental expenses incurred by the supplier such as packing, loading, unloading, and transportation charges related to the supply, if paid or payable by the recipient.
- Subsidies provided by the recipient or a third party directly linked to the supply price. For example, if a supplier offers a discount that is compensated by a third party, the subsidy amount must be included.
All these inclusions are subject to the condition that they are related to the supply, charged by the supplier, and paid or payable by the recipient, either directly or indirectly.
Conditions for Inclusions
Inclusions must satisfy the following conditions to be added to the transaction value:
- The amount must relate to the supply of goods or services.
- It must be charged by the supplier to the recipient or someone on the recipient’s behalf.
- The amount must be paid or payable by the recipient, either directly or indirectly.
These conditions ensure that only amounts genuinely connected to the supply and paid by the recipient are included in the valuation, avoiding arbitrary additions.
Exclusions from Transaction Value
Certain amounts are excluded from the transaction value under Section 15(3) of the CGST Act. These exclusions prevent the taxable value from being artificially inflated and avoid cascading taxes.
- The amount of GST charged on the supply itself cannot be included, preventing tax-on-tax effect.
- Discounts given before or at the time of supply, which are specifically linked to the supply and recorded on the invoice, may be excluded from the transaction value. For example, if the supplier gives a 10% discount on the invoice price, this may be excluded provided it is documented.
- Post-supply discounts, such as volume rebates or year-end discounts, are also excluded if they satisfy prescribed conditions. The discount must be established in an agreement entered into at or before the time of supply, and the actual quantum of discount is determinable after supply. The supplier must issue proper documentation like credit notes, and the recipient must reverse the input tax credit proportionate to the discount.
- Subsidies provided by the government directly linked to the supply price are excluded from the transaction value.
- Any tax, duty, fee, or charge that is not related to the supply (for example, income tax, penalty, or fine) is excluded.
Conditions for Exclusions
For discounts or rebates to be excluded from the transaction value, the following conditions must be met:
- The discount should be linked to the supply of goods or services.
- The discount must be given before or at the time of supply or be established in an agreement entered into at or before the time of supply.
- The supplier must issue proper documents such as credit notes.
- The recipient must reverse the input tax credit attributable to the discount.
This ensures that the exclusion is justified and verifiable, preventing misuse of discount provisions to reduce the taxable base artificially.
Impact of Promotional Schemes on Valuation
Promotional schemes like free samples, gifts, and buy one get one free (BOGO) offers add complexity to GST valuation.
- Free samples or gifts given without consideration are generally not treated as supply unless they fall within Schedule I of the CGST Act, which treats certain activities as supply even without consideration. The supplier cannot claim input tax credit on inputs used for such free supplies unless they qualify as supply under Schedule I.
- BOGO offers are treated as supplies made for a single price and are either composite or mixed supplies. The GST rate is applied on the entire supply based on the principal supply concept. Suppliers can claim input tax credit for inputs used in such supplies.
- Discounts, including “buy more, save more” schemes, can be excluded from the transaction value if they meet the conditions of Section 15(3), as explained earlier.
Understanding the treatment of these schemes is crucial for correct valuation and ITC claim.
Documentation Requirements
To substantiate inclusions or exclusions from the transaction value, maintaining accurate and timely documentation is essential. This includes:
- Properly issued invoices reflecting discounts or rebates.
- Agreements or contracts detailing the terms of discounts or promotional offers.
- Credit notes issued post-supply to account for volume or periodic discounts.
- Records evidencing subsidies or contributions from third parties related to the supply.
- Documentation supporting the nature of any related-party transactions.
Without such documentation, tax authorities may disallow claimed exclusions, leading to increased tax liability and penalties.
Valuation in Case of Non-Monetary Consideration
When the consideration for supply is not in money, for instance, barter transactions, the valuation must be based on the open market value of the goods or services supplied. Open market value means the price at which the supply would be made between unrelated parties in the open market.
In such cases, businesses need to ascertain and document market values diligently to support valuation claims and ensure GST compliance.
Promotional Schemes under GST and Their Tax Implications
Promotional schemes are a common marketing strategy used by businesses to attract and retain customers. Under GST, these schemes raise specific valuation and taxability issues because they often involve free supplies, discounts, or bundled offers that impact the value of supply and input tax credit eligibility. To address these challenges, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 92/11/2019-GST dated 7 March 2019, providing detailed clarifications on the GST treatment of promotional schemes.
We explained the GST implications of various promotional activities including free samples, gifts, buy one get one free offers, and discounts such as “buy more, save more” schemes. Understanding these guidelines helps businesses correctly value supplies, comply with GST laws, and optimize tax benefits.
Treatment of Free Samples and Gifts under GST
Free samples and gifts are often distributed by manufacturers and suppliers to dealers, stockists, or customers as a part of promotional campaigns. From a GST perspective, the taxability and valuation of such supplies depend on whether there is any consideration involved.
If free samples or gifts are supplied without any consideration — meaning the recipient does not pay or agree to pay for them — such supplies generally do not qualify as a taxable supply under GST. The exception is when the activity is specifically covered under Schedule I of the CGST Act, which lists transactions treated as supply even without consideration. For example, transfers between distinct persons or related persons without consideration are treated as supplies.
Since free samples and gifts supplied without consideration are generally not treated as taxable supplies, the supplier is not required to pay GST on them. However, suppliers also cannot claim input tax credit on inputs, input services, or capital goods used in making such free supplies unless the activity falls within Schedule I.
GST Treatment of Buy One Get One Free Offers
Buy one get one free (BOGO) offers are popular sales promotion tactics where customers receive additional goods free of cost when they purchase certain items. Common examples include “buy one soap and get one soap free” or “get a free toothbrush with the purchase of toothpaste.”
At first glance, the free item appears to be a supply made without consideration. However, GST treats these as composite or mixed supplies. In such cases, multiple goods are supplied for a single price, and the value of the free item is included in the total consideration charged.
The taxability and applicable rate depend on whether the supply qualifies as a composite supply or a mixed supply, as defined under Section 8 of the CGST Act. A composite supply involves a principal supply accompanied by ancillary supplies, taxed at the rate applicable to the principal supply. A mixed supply involves two or more distinct supplies bundled together, taxed at the highest rate applicable to any of the components.
For valuation, the total price charged by the supplier covers both the paid and free items. GST is calculated on this entire amount, and input tax credit is available to the supplier for inputs, input services, and capital goods used for all goods supplied, including those given free under the offer.
Discounts and Their Impact on GST Valuation
Discounts affect the value of supply and, consequently, the GST payable. Various types of discounts exist, and their GST treatment depends on the timing and linkage to the supply.
Types of Discounts
- Discounts Given Before or At the Time of Supply
These are discounts clearly indicated on the invoice and linked directly to the supply. Examples include trade discounts or promotional price reductions shown on the invoice. - Post-Supply Discounts or Volume Discounts
These include periodic or year-end discounts granted to customers or stockists based on cumulative purchases. Such discounts are generally agreed upon at or before the time of supply but determined after supply has been effected. For example, an additional 1% discount if the buyer purchases 10,000 units in a year.
Conditions for Excluding Discounts from Transaction Value
Discounts can be excluded from the transaction value for GST purposes only if they satisfy conditions set out in Section 15(3) of the CGST Act:
- The discount is established in an agreement entered into at or before the time of supply.
- The actual quantum of discount is determined after the supply is affected.
- The discount is specifically linked to the price of the supply.
- The supplier issues appropriate documentation, such as credit notes, to reflect the discount.
- The recipient reverses input tax credit attributable to the discount.
If these conditions are met, the value of supply is reduced by the amount of the discount. If the conditions are not met, the discount is not excluded and GST is payable on the gross amount.
Input Tax Credit on Discounts
Suppliers are entitled to claim input tax credit on inputs, input services, and capital goods used in supplies where discounts are given, regardless of whether the discount is given before or after supply, as long as the discounts meet the conditions for exclusion from transaction value.
Buyers must reverse input tax credit proportionate to post-supply discounts to maintain compliance with GST provisions.
Other Promotional Schemes and GST Implications
Apart from free samples, BOGO offers, and discounts, other promotional schemes also have GST implications.
- Gifts with Consideration: If gifts are given for consideration, they are treated as supplies and taxed accordingly.
- Free Goods in Bundled Supplies: When free goods are bundled with paid supplies as part of a single price, the entire value is taxable, and input tax credit is available on the inputs related to the entire supply.
- Trade Schemes and Incentives: Incentives provided to distributors or stockists, such as volume rebates or cash discounts, impact valuation and input tax credit and must be carefully accounted for.
Understanding the nature of each promotional scheme and its linkage to supply helps in correctly determining the taxable value and ensuring the correct GST treatment.
Documentation and Compliance for Promotional Schemes
Proper documentation is vital for substantiating the GST treatment of promotional schemes. This includes:
- Agreements detailing the terms and conditions of discounts, rebates, and free supplies.
- Invoices reflecting the correct valuation and any discounts granted.
- Credit notes issued for post-supply discounts or rebates.
- Records of free samples and gifts given, including justification for non-taxability.
- Evidence supporting the linkage of subsidies or incentives to the supply.
Accurate records help avoid disputes during audits and assessments and support claims for input tax credit.
Impact on Input Tax Credit
Input tax credit (ITC) availability depends on whether the supply is taxable and on the nature of discounts or promotional schemes.
- For free samples not treated as supply, no ITC is available on related inputs.
- For supplies under BOGO offers or bundled supplies taxed as composite or mixed supplies, ITC is available on inputs used.
- Discounts excluded from transaction value do not affect the supplier’s eligibility for ITC.
- Recipients must reverse ITC proportionate to any post-supply discounts or rebates to comply with GST rules.
Businesses must coordinate valuation and ITC management carefully to optimize tax benefits while maintaining compliance.
Challenges and Considerations
Despite clarifications, practical challenges remain in applying GST provisions to promotional schemes:
- Determining whether free goods qualify as supply can be complex, especially for cross-border transactions or transfers between distinct persons.
- Identifying the principal supply in mixed or composite supplies may require detailed analysis.
- Documentation lapses may lead to disallowance of discounts or ITC claims.
- Disputes may arise over the valuation of bundled supplies or the timing and linkage of discounts.
Businesses should proactively review promotional schemes, maintain detailed records, and seek expert advice to navigate these challenges effectively.
Conclusion
Accurate valuation under GST is fundamental to correct tax compliance and financial management. The transaction value remains the cornerstone for determining the value of supply, but it is contingent upon the supplier and recipient being unrelated and the price being the sole consideration. When these conditions are not met, prescribed valuation methods must be applied to ensure the taxable value reflects a fair market price.
Identifying related persons is a critical step, as transactions between such parties require careful scrutiny to prevent manipulation of values. The rules laid out under the CGST Act and Rules provide structured approaches for valuation between related or distinct persons, ensuring transparency and consistency.
Inclusions and exclusions from the transaction value significantly impact the taxable amount. Charges like taxes (other than GST), royalties, and incidental expenses must be included, while bona fide discounts and government subsidies linked to the supply can be excluded, provided specific conditions are met and supported by proper documentation.
Promotional schemes such as free samples, gifts, buy one get one free offers, and various discounts introduce additional complexity to valuation and input tax credit claims. The clarifications issued by the CBIC guide businesses on correctly treating these schemes under GST, ensuring that the tax liability is appropriately computed and ITC is correctly claimed or reversed.
Businesses must maintain meticulous records, issue proper documentation, and carefully analyze the nature of supplies and related transactions to navigate the practical challenges of GST valuation. Adhering to these principles not only ensures compliance but also helps avoid disputes, penalties, and financial losses, ultimately supporting smooth business operations under the GST regime.