Determination of value for transactions between the Related parties under GST Laws.
By: – Anuj Bansal
Goods and Services Tax – GST
Dated:- 17-10-2016
Determination of value for transactions between the Related parties under GST Laws.
This article is in continuity of Author's earlier articles in regard to transition of registration and input tax credit from present regime to GST regime. In the earlier articles, legal provisions in regard to transition of registration and closing balance of input tax credit from present regime to GST regime were discussed in detail and it was explained that registration as well as input tax credit will automatically be transferred to GST regime subject to certain conditions.
As a matter of principle, tax will be leviable under GST law at each stage of transaction at the prescribed rate. Tax will be leviable on the value of the transaction entered into between the parties. Section 15 of Model GST Law provides that for the purpose of lev
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or indirectly controls the other;
(f) Both of them are directly or indirectly controlled by a third person;
(g) Together they directly or indirectly control a third person; or
(h) They are members of the same family;
As per the above provision, the definition of related persons is very wide and extends to even the employer & employees, family members, etc.
In the aforesaid background and the provisions of Model GST Law, it is important to examine the provisions which will govern determination of transaction value in case the transactions are between the related parties. In this regard, Rule 3(4) of GST Valuation Rules provides that transaction value shall be accepted where the supplier and recipient are related parties, provided that the relationship has not influenced the price of the goods and service. Accordingly, in the circumstances where the relationship of the parties has not influenced the value, transaction value shall be accepted by the Officer. However, as per Rule
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tated that where the value determined is not the proper transaction value, the value shall be determined on the basis of transaction undertaken by such supplier with other customers of the goods / services of like kind and quality. However, in determining the value on the basis of comparison, certain adjustments are prescribed in Rule 4(2) which the officer shall consider while determining the transaction value. The adjustments prescribed includes difference in dates of supply, difference in commercial level and quantity level, difference in composition / quality and design between goods and services and difference in freight and insurance charges depending on place of supply. However, if the valuation is not determinable under Rule 4 then the officer will proceed to Rule 5 in determining the value which is called a computed value method.
Computed value method – Vide Rule 5 of the GST valuation rules, it is stated that in order to determine the transaction value various types of cost
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the provisions like value is “significantly lower or higher”, “reason to doubt”, etc. which are vague and subject to litigation.
In these circumstances, it is stated that these discretionary powers will lead to litigation. It is also important in this regard to examine whether such powers were necessary to be provided under the law. As per GST law, tax will be leviable at the prescribed percentage at each of the stage of transaction. Accordingly, in case intervening transactions i.e. prior to the last transaction with the consumer, are between the related parties and assuming same are at value less than the reasonable value, the tax if charged at a lower value at the initial stage, same will be charged at the higher value at the second stage when the buyer will further sell the goods or will use for the manufacturing process or for providing any services, etc. In totality, there will be no tax impact on under valuation at initial stages of the transactions. There can be impact only i
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in regard to related party transactions. However, in applying such principles / provisions under GST laws, the Government has ignored that such provisions are not much relevant in GST law for the reason that under Excise & Customs laws, Cenvat of the duty paid at the manufacturing stage or at the stage of import into India, is not available to the dealer when the dealer is entering into next stage of transaction i.e. a manufacture entering in to trade stage or an importer entering into stage of manufacturing / trading. Therefore, if at any stage either at the time of import of goods or at the time of manufacturing goods, the price is influenced / undervalued due to relationship between the parties, there would a revenue loss. However, under GST law, since there is smooth flow of credit, there would not be any revenue loss even if any intervening transaction in the chain is undervalued unless it is a last sale i.e. the sale for consumption.
In the light of above discussion, it seems v
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