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GST Valuation Rules for Transactions Between Related Parties

This article explains the Goods and Services Tax (GST) rules for valuing supplies between related persons in India. It defines who qualifies as a 'related person' under GST, typically entities with shared control but separate legal existence. The article outlines methods for determining supply value, prioritizing open market value, followed by values of like kind and quality, or cost/residual methods. It also highlights a special provision for recipients eligible for full Input Tax Credit, where the invoice value is deemed as the open market value.

📖 2 min read read🏷️ GST Valuation

Businesses often operate across various states through multiple branches or subsidiaries. According to Goods and Services Tax (GST) regulations, each such operational entity typically requires distinct registration in its respective state. Furthermore, a large corporate group might comprise several distinct legal entities under a unified control. For example, Tata Steel and Tata Motors operate as separate legal entities within the broader Tata Sons conglomerate, even when Tata Steel provides raw materials to Tata Motors. Entities like these, which maintain separate legal identities yet share common oversight, are categorized as "related persons" under the GST framework.

These regulations aim to ensure that business transactions between related parties are conducted transparently and in good faith.

Methods for Determining Supply Value Between Related Persons

When transactions occur between related persons under GST, the valuation of the supply follows specific guidelines:

  • Open Market Value (OMV): The primary method is to determine the Open Market Value of the supply. This represents the price at which the goods or services would be readily available in the general market.
  • Value of Like Kind and Quality: If the Open Market Value cannot be ascertained, the value should be based on comparable goods or services of similar type, quality, and quantity. The taxable entity can reference analogous supplies to establish this value.
  • Cost or Residual Method: Should the value remain undeterminable through the preceding methods, it must then be established using either the Cost Method or the Residual Method.
  • Input Tax Credit (ITC) Provision: A notable exception applies if the recipient of the goods or services is entitled to claim the full Input Tax Credit. In such instances, the value stated on the invoice is considered equivalent to the open market value of the supply.

Considering the earlier example of related entities under GST, imagine Tata Steel supplies goods with an Open Market Value (OMV) of Rs. 1,50,000 to Tata Motors, but charges Rs. 1,00,000. If Tata Motors subsequently claims the full GST amount of Rs. 18,000 (calculated at 18% on Rs. 1,00,000) as Input Tax Credit, then this invoice value is accepted for valuation purposes. Ultimately, when Tata Motors sells its final products to consumers, its available Input Tax Credit will be limited to the Rs. 18,000 already paid, rather than the tax that would have been due if the transaction occurred at the OMV.

Frequently Asked Questions

What is GST in India?
Goods and Services Tax (GST) is a unified indirect tax levied on the supply of goods and services throughout India. It replaced multiple cascading taxes previously levied by the central and state governments.
Who is required to register for GST?
Businesses exceeding a specified annual turnover threshold are generally required to register for GST. This threshold varies depending on the type of goods or services supplied and the state of operation.
What are the different types of GST in India?
There are four main types: Central GST (CGST) and State GST (SGST) for intra-state supplies, Integrated GST (IGST) for inter-state and import supplies, and Union Territory GST (UTGST) for supplies within Union Territories.
How is input tax credit (ITC) utilized under GST?
Input Tax Credit allows taxpayers to reduce their tax liability by claiming credit for the GST paid on purchases of goods and services used in their business operations. ITC can be offset against output GST liability.
What are the consequences of non-compliance with GST regulations?
Non-compliance can lead to various penalties, including fines, interest on delayed payments, and even prosecution in severe cases, emphasizing the importance of timely filings and accurate reporting.