Determining Taxable Value of Supplies Under India's GST Regime
The Goods and Services Tax (GST) in India relies on specific rules for valuing supplies to ensure accurate tax calculation. This article explains how the "transaction value" forms the basis for GST, detailing various inclusions such as other taxes, incidental expenses, non-government subsidies, and delayed payment charges. It also provides examples and discusses the treatment of discounts and foreign currency transactions under the GST framework.
The Goods and Services Tax (GST) aims to unify indirect taxes in India, establishing a "One Nation, One Tax" system. This new indirect taxation framework raises significant questions for organizations, particularly regarding the valuation of supply for GST purposes and which components are included in the taxable supply's value.
Former Tax System vs. GST Valuation
Previously, taxes were calculated based on the value of goods or services as follows:
| Tax | Value of goods/services |
|---|---|
| Excise | Transaction value of goods or MRP |
| VAT | Sale Value |
| Service tax | Taxable value of service rendered |
Under the GST framework, the transaction value forms the basis for tax calculation. This value represents the actual price paid or payable for goods or services supplied between unrelated parties, where the price is the only consideration.
Key Elements Included in GST Supply Value
The value of supply under GST encompasses several elements:
- Any other taxes, duties, cesses, fees, and charges imposed under any other law, excluding GST itself. The GST Compensation Cess is also excluded if it is separately itemized by the supplier.
- Any amount the supplier is obligated to pay, but which the recipient has incurred and is not already part of the selling price.
- All associated expenses related to the sale, such as packaging and commission charges, will be part of the value.
- Subsidies directly linked to the supply, excluding those provided by the government, are to be added.
- Charges like interest, late fees, or penalties due to delayed payment for the supply are also included.
Practical Example of GST Valuation
Consider a scenario where ABC, a hardware manufacturer, sells a power drill to XYZ, a wholesaler. The product's Maximum Retail Price (MRP) is Rs. 5,500, but it is sold for Rs. 3,000.
Under the Previous Regime:
The invoice under the old tax system would typically appear as:
| Item | Amount |
|---|---|
| Power Drill | 3,000 |
| Add: Excise @ 12.5% | 375 |
| Subtotal | 3,375 |
| Add: VAT @14.5% (on subtotal) | 490 |
| Total | 3,865 |
Value of Supply Under GST:
Under GST, the transaction value of Rs. 3,000 is used for valuation. Assuming Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are both 9%:
| Item | Amount |
|---|---|
| Power Drill | 3,000 |
| Add: CGST @9% | 270 |
| Add: SGST @9% | 270 |
| Total | 3,540 |
Treatment of Discounts Under GST
GST introduces specific rules for discounts. Discounts offered at or prior to the time of supply are deductible from the transaction value. Post-supply discounts are permitted as deductions only if certain conditions are met.
Currency Exchange Rates for Non-INR Transactions
For international transactions, such as exports, invoices may be denominated in foreign currency. Any Integrated Goods and Services Tax (IGST) on these invoices must be converted into Indian Rupees using the exchange rates provided by the Reserve Bank of India (RBI). RBI exchange rates are also applicable for imports and for converting invoice amounts when reverse charge applies to imported supplies. Further information on the time of supply for goods and services is available.