/ GST

Specific Issues & Challenges Under Valuation under GST

GST bank account

Specific Issues and Challenges Under Valuation under GST,

The document titled “Valuation under GST – Specific Issues and Challenges” provides detailed insights into key valuation issues under GST, specifically on topics like post-supply discounts, the concept of pure agents, related party transactions, and damages/compensation.

Treatment of Discounts under Section 15 under GST law :

  • Value of Taxable Supply: Transaction value: Price actually paid or payable. Must meet conditions: Supplier and recipient are not related. And Price is the sole consideration.
  • Exclusion of Discounts: a. Before/at the time of supply: Must be recorded in the invoice. b. After supply: Requires pre-supply agreement specifying discount terms (quantum or percentage). Must link discounts to relevant invoices. Recipient must reverse attributable ITC.

Post-Supply Discounts:

  • Discounts provided post-supply can be excluded from the value of supply if they meet conditions under Section 15(3) of the CGST Act.
  • The discount must be agreed upon in advance, linked to specific invoices, and the recipient must reverse the Input Tax Credit (ITC) on the discounted amount.
  • Abnormal or arbitrary discounts without criteria may be disallowed.
  • Ultratech Cement Limited (2018): Discounts must be clearly defined in agreements. And Ambiguous or abnormal discounts are disallowed.

Pure Agent Rules (Rule 33 of CGST Rules)

  • Definition: Acts on behalf of the recipient of supply, Reimbursement is strictly on actual costs and Holds no title to goods/services procured. Provides separate invoices for reimbursed costs. To qualify as a pure agent under GST, certain strict conditions must be satisfied:
    • Acting as an agent authorized by the recipient.
    • Reimbursement must be on an actual basis.
  • Several case laws (e.g., on wages, EPF/ESI, and fuel reimbursement) highlight challenges in claiming exclusions under the pure agent rule.
  • Conditions for Exclusion from Value: Authorization by the recipient to incur costs. Clear indication of reimbursed amounts in invoices. And Services procured for the recipient must be in addition to supplier’s own services.
  • Prodip Nandi (2022): Salary and wages excluded only if accompanied by an additional service.
  • Lucknow Producers Cooperative Milk Union Ltd. (2021): EPF/ESI reimbursements included in value as pure agent conditions were unmet.
  • Global Vectra Helicorp Ltd. (2021): Fuel costs reimbursed without pure agent evidence are taxable.

Related Party Transactions:

  • Transactions with related parties, such as free supplies or services between a partner and a partnership firm, are treated as supplies under GST, even without consideration.
  • Transactions between related parties (e.g., firms and partners) are taxable even without consideration. GST valuation governed by Rule 28 or 31 depending on ITC eligibility and customizations.
  • GST valuation rules (e.g., Rule 28 or Rule 31) guide the determination of taxable value.
  • P.H. Dream Cricket (2022): Complimentary tickets to related parties subject to GST.
  • Shanmuga Durai (2022): Partner’s property used by a firm for free is deemed a taxable supply.

Damages and Compensation:

  • Payments made as damages or compensation are scrutinized for GST applicability under Schedule II of the CGST Act. Scope of Schedule II: Damages/compensation may not always qualify as “supply.”
  • The rulings emphasize that damages do not qualify as a supply unless there is reciprocity or an obligation agreed upon.
  • Consideration vs. Contract Condition: Damages are typically for breach or failure to fulfill obligations, not for reciprocal obligations.
  • Bombay HC (Bai Mamubai Trust): Payment for trespass or illegal occupation is not a supply as it lacks reciprocity.
  • North American Coal Corporation (2018): Liquidated damages for tolerating delayed supply are taxable under Schedule II.
  • Court receiver is a department of High Court and fees charged by such office not liable to GST
  • Basis of payment of royalty (in the interim) is alleged illegal occupation or trespass by defendant
  • Such payment lacks reciprocity to make it supply under GST
  • “Where no reciprocal relationship exists, and the plaintiff alleges violation of a legal right and seeks damages or compensation from a Court to make good the said violation (in closest possible monetary terms) it cannot be said that a ‘supply’ has taken place.”
  • Supply requires enforceable reciprocal obligations – Does not cover unilateral act or those resulting in payment of damages
  • Seeking money decree versus suit against illegal occupation / trespass (claim will be one of damages)
  • Quantification does not determine character of payment as consideration

GST taxpayers do is charge IGST or CGST and SGST – In case Place of Supply in Different state 

Question: A GST taxpayer provides a supply of service in Gurugram. But party GST No. in Delhi. So what GST taxpayers do is charge IGST or CGST and SGST. Please suggest.

Ans : Yes, the GST taxpayer should charge IGST in this case. The basic reason behind this is :

  • Location of Supplier: Gurugram, Haryana.

  • Place of Supply: Since the recipient (registered party) has a GSTIN in Delhi, the place of supply is Delhi as per Section 12(2) of the IGST Act, 2017 (for B2B transactions).

  • GST Type to be Charged: Since the supplier is in Haryana and the recipient is in Delhi (different states), this qualifies as an interstate supply. As per Section 7(1) of the IGST Act, 2017, interstate supply attracts IGST.

  • The taxpayer should charge IGST, not CGST & SGST.

**********************************************************

If this article has helped you in any way, i would appreciate if you could share/like it or leave a comment. Thank you for visiting my blog.

Legal Disclaimer:
The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.