When Discount is Given AFTER Supply
AND
It is NOT KNOWN at the Time of Supply
XYZ is facing serious liquidity problems and requests WHL to pay within 2 days. It offers additional 1% discount. WHL agrees and pays.
Value of Supply where Consideration is Not Wholly in Money
Businesses operate in a dynamic model and we have witnessed innovative schemes wherein a buyer is required to pay the partial amount in cash and the rest in kind, such as when exchanging used goods for a new product. As a general principal, value of supply will be the amount of consideration received in money from the buyer.
However, there can be cases when partial consideration is in money and the rest` is in kind. In such scenario, the value of supply shall be:
*Open Market Value of such supply. OMV will be the amount which is fairly available in open market.
*If the open market value is not available, the value of supply will be the sum of the 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. In simple words the monetary value of partial
consideration will be added to monetary consideration, to sum up to total consideration.
*If the value is not determinable under the points above, the value of supply of goods or service or both will be equivalent to that of like kind and quantity. Here the taxable person can refer to similar goods or services or both for determining the value of supply.
*If the value is not determinable under all the above clause, the value shall be the sum total of consideration in money and such further amount of money that is equivalent to consideration not in money as determined on the basis of Cost Method or Residual Method.
Here’s an example to help you understand this better:
Where a new TV is supplied for INR 20,000 along with the exchange of an old TV and if the price of the new TV without exchange is INR 24,000 the open market value of the new TV is INR 24,000.
Where a laptop is supplied for INR 40,000 along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is INR 4,000 but the open market value of the laptop is not known, the value of the supply of laptop is INR 44,000.
This discount was not known at the time of supply, and so it cannot be claimed as a deduction from the transaction value for GST calculation. So the invoice will be same as above.
Value of Supply of Goods or Services Between Related Person Under GST
Many businesses have multiple branches across states. Under the new GST law, they are required to register separately in each state they are operable in. Also, there can be multiple entities within a conglomerate which would also require multiple registrations under GST. For instance, TATA Steel and TATA Motors are both considered separate legal entities under TATA Sons, even though the former supplies inputs to the latter. Such business entities which may have separate legal existence while sharing a common control, fall under the definition of ‘related person’ under GST law.
In case of supply between such related person under GST, value of supply will be:
*The Open Market Value (OMV) of such supply. OMV will be the amount which is fairly available in open market.
*If the open market value is not available, it will be the value of supply of goods or services of like, kind and quantity. Here, the taxable person can use as reference similar goods or services or both for determining the value of supply.
*If the value is not determinable in the above two cases it shall be determined by either by the Cost Method or Residual Method.
If the recipient of goods or services (or both) is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or service. The above provisions have been included to safeguard the transactions done during the normal course of business between related persons, in good faith.
Taking our aforementioned example of related person under GST Law, let’s say that TATA Steel supplies goods worth INR 1,50,000 (which is the OMV of the goods) to TATA Motors for INR. 1,00,000; and TATA Motors claims the full amount of GST charged in the invoice which is INR 18,000 (@18% of INR 1,00,000) as input tax credit, then this invoice value will hold true for valuation purpose. Eventually, when TATA Motors sell their products to their end consumers they will only get input credit of what was paid earlier as tax i.e. INR 18,000 (and not the tax that should have been paid if the goods were sold at OMV).
Value of Supply of Goods Made or Received Through an Agent
The recently introduced GST valuation rules specifically cover situations where goods are supplied by the Principal to an agent or vice versa. Such supplies are chargeable under GST. In simple words, any supply from Principal to an agent or otherwise will attract GST and thus either of the parties need to refer to these valuation rules to avoid a dispute with tax administrative authorities.
Who is a Principal?
As per the definition provided in the GST law, the term “Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services, or both. For instance, a dealership store of an automobile company is an excellent example of Principal-Agent relationship.
1. Either of:
a) Open Market Value, or;
b) Ninety percent (90%) 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 goods are intended for further supply by the said recipient.
Example: Let’s assume that the principal Mr. X, supplies groundnuts to his agent. The agent Mr. Y, supplies groundnuts of like kind and quality in subsequent supplies at a price of INR 5,000 per quintal on the day of supply. Another independent supplier Mr. Z, is supplying groundnuts of like kind and quality to the said agent at the price of INR 4,550 per quintal. The value of the supply made by the principal Mr. X, shall therefore be INR 4,550 per quintal (the open market value of groundnuts) or where he exercises the option the value shall be 90% of INR 5,000 i.e. is INR 4,500 per quintal.
2. In case if it can not be determined on the basis of the rule above, the value shall be determined on the basis of Cost Method or Residual Method.
