Basics & Rules:
How do I calculate the value of supply under the GST?
To determine the value of the goods and/or services to which GST will be applied, we have two different sets of rules according to the type of consideration/payment (refer Q.2) the seller receives.
General Valuation Rules - These apply to transactions where the consideration is given entirely in monetary form.
In this case, the consideration can be calculated as the sum of the value of supply and the GST imposed upon the value of supply. The consideration is also equal to the total amount that you pay to a supplier when you purchase an item or a service. (Consideration = Value of Supply + GST on Value of Supply)
Special Valuation Rules - These apply to transactions where the consideration is provided fully or partially in non-monetary forms.
In transactions where the consideration is completely non-monetary, the value of supply can be calculated as the difference between the Open Market Value (OMV) of the product and/or service and the GST imposed on this value. (Value of Supply = OMV - GST on OMV)
In transactions where the consideration is only partially monetary (it includes both cash and in-kind components), the consideration can be calculated as the sum of the monetary portion of the transaction and the OMV of the in-kind portion. (Consideration = Monetary Consideration + In-kind Consideration) The value of supply will be equal to the difference between the consideration received and the GST imposed on the consideration. > (Value of Supply = Consideration - GST on Consideration)
What do you mean by consideration under GST and why is it so important?
A consideration is anything received in exchange for the supply of goods, services, or both. It can be monetary (through cash, credit cards or electronic transfers), non-monetary (through bartering of goods, exchange of services or having conditional arrangements in place), or a combination of both.
In simpler terms, consideration is whatever you pay for the goods or services that are provided to you. It includes any taxes involved.
For GST to be applied to a transaction, we need to establish the value of what’s being supplied. The consideration is important because it provides the primary way to calculate that value.
What do you mean by related parties or associated parties under the GST? How do I calculate the value of transactions between related parties?
According to the Indian Custom Valuation Rules (rule 2(2) of ICVR 2007), two persons or parties shall be deemed “related” only if:
They are professionally related. For instance, they can be officers/directors of one another’s businesses, legally recognized business partners, or one can employ the other.
There is any person who directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;
Both of them are directly or indirectly controlled by a third person or vice versa;
They are members of the same family who do business together.
They are associated in the business of one another, where one is the sole agent/ sole distributor/ sole concessionaire of the other.
Transactions between related parties must follow the Arm’s Length Principle, according to which the value of any supply between them should be equal to its open market value.
Does it make a difference for the value of supply whether the transaction is associated with SGST, CGST, or IGST?
No, the rules of valuation are the same for both inter-state and intra-state trade.
How is the value of supply calculated for contracts?
The value of supply for contracts is usually equal to the contract price (or transaction value) agreed between two or more transacting parties. That said, in instances where the vendor and customer are related or the transaction is made without any consideration (for free), the value of the transaction must be calculated using the rules of valuation under the GST law (refer Q.1).
How does the tax authority check a suspicious transaction value?
Apart from the regular methods (discussed under Q.1), there are other methods which are used by tax officers when a transaction is found to be not suitable for valuation under general or special valuation rules. This usually happens when the declared value is suspiciously high or suspiciously low.
Comparison method - In this method, the officer evaluates the value of a transaction by comparing it with the values of similar transactions involving goods or services of like kind and quantity. When using this method, the officer will consider factors like dates of supply, commercial levels, the nature of the goods or services, and other expenditures related to the place of supply.
Computed value method - Under this method, the officer considers the value of supply to be equal to the complete cost of the goods and/or services involved (including profit margins). This method is imposed only when the correct value of supply cannot be determined using the comparison method.
Residual method - An officer resorts to using this method when both the comparison method and the computed value method cannot be used. Under these circumstances, the officer can determine the value within reasonable means consistent with the principles and general provisions of the GST valuation rules.
How do I charge tax on an invoice which includes the sale of both goods and services?
There are two situations where this can occur:
Scenario 1: Composite model of supply
When a business sells services and goods which are dependent on each other and are sold as a package, that’s called a composite supply. The tax rate for the whole supply will be based on the primary, or independent, portion of the supply. If the goods are dependent on the services, use the tax rate for the services. If the services are dependent on the goods, use the tax rate for the goods.
Example: Suppose you have an interior design business that provides design services and then delivers finished products based on the design work. Here the primary business (or independent variable) is the design service, and the materials for interiors are dependent on the services. When you raise an invoice, you’ll charge a GST service rate of 18% for both the value of the services and the value of the materials.
Scenario 2: Mixed model of supply
In the mixed model of supply, a business sells goods and services which are independent of each other and can be offered either together or separately.
When you raise an invoice for a mixed supply, charge the GST rate for the portion of the supply with the higher value. If the value of the products sold is higher than the services provided, then you should charge the GST tax rate for the products. If the value of the services provided is higher than the value of the products sold, then you should charge the GST service tax rate of 18%.
Example: Suppose your business sells ornamental plants and provides gardening services as well. In this case, both are primary businesses; you can either sell plants and services separately, or combine them and offer them to customers together. So both are independent variables. When you supply plants and gardening services together as a bundle and if the GST rate of gardening services is greater than the GST rate of your ornamental plants then the gardening service becomes the principal supply and so its GST rate will be applicable to all the components of the bundle.
How are stock transfers between different locations of the same organization valued under GST?
It’s important to consider whether the stock is being transferred between states, or within a single state. Under GST, interstate transfer of stock within the same organization is viewed as a taxable supply, even though there is no consideration provided (as nothing will be received reciprocally for such a transaction). The value of supply is equivalent to the declared value of the products that are being transferred.
Stock transfers within the same state are not taxable, so there is no need to determine their value for GST.
What is the tax treatment when customer’s billing address is within the state but the delivery address is outside the state?
Tax treatment is based on the place of delivery of services or goods. So when you’re delivering goods and services outside the state, IGST will be charged. But IGST can only be charged when the supplier and customer’s GSTIN state codes are different on the invoice. So if a customer is receiving goods or services outside the state, the invoice should show the delivery address and GSTIN along with the billing address.
Imports and exports:
How do I calculate the GST levied on imported services?
The GST to be paid on an imported service can be calculated by multiplying the total consideration by the taxable percentage to get the value of taxable supply, then multiplying that value by the GST rate.
Let’s say that a company in India hires the services of a company from Japan for a project for 40 lakh rupees.
*GST = Rate * (Taxable Percentage * Consideration)*
Consideration = 40,00,000/-
GST Rate = 10%
Percentage of Taxable Supply = 40%
GST = 10% * (40% * 40,00,000) = Rs. 1,60,000/-
How do I calculate the value of supply on imported goods under the GST?
Let’s suppose you own a business that imports t-shirts from the US and sells them in India. The supplier sends you invoices in dollars.
Upon delivery, the customs department will asses the stock value in INR based on the current exchange rate and levy custom duty charges on the assessed value. Example: If your current invoice is for $1,000 and the current exchange rate is $1 to Rs. 64, the assessed value will be Rs. 64,000. So if the duty rate is 5%, you will need to pay custom duty charges of Rs. 3,250.
The importer must pay IGST on the total taxable value of the goods, which equals the assessed value plus the duty charges. They must file a Bill of Return to report the duty charges and IGST; after the Bill of Return is filed, the importer will be eligible for ITC on the IGST they paid. Example: Your total taxable value is Rs. 64,000 + Rs. 3,250 = Rs. 67,250 and the IGST rate is 28%. So you must file a Bill of Return and pay IGST of 28% * Rs. 67,250 = Rs. 18,830, for which you can claim ITC.
The importer must pay shipping and insurance charges, inclusive of the IGST paid for the import, in INR. IGST paid on these charges cannot be claimed as input tax credit.
When the importer pays for the goods, the exchange rate may be slightly different from when the customs value was assessed. This can cause a difference between the payment amount and the assessed value (a realized exchange loss or gain). In the above example, you pay your supplier the equivalent of $1,000 45 days after receiving the goods. The exchange rate has changed, and your payment is no longer equal to exactly Rs. 64,000. You can see your realized exchange loss or gain in the Reports section of Zoho Books.
When you sell the t-shirts, you will levy the appropriate GST rates and record them on the sales invoice.
Are overseas customers zero-rated or tax-exempt?
Overseas customers fall under the zero-rated tax slab. When selling to overseas customers, a tax invoice has to be created with 0% tax applied to the goods or services.
How do resellers charge GST on the sale of MRP goods?
For maximum retail priced goods, GST will be included in the price. When you create an invoice, you should enter the tax-inclusive selling price. Let’s say a reseller sells 100 biscuit cartons for Rs. 45 each (inclusive of tax) to a retailer. The invoice total amount will be Rs. 4500, which includes the GST rate of 5% (Rs. 214) which the reseller is liable to pay to the government on behalf of the customer.
Can a reseller get ITC on the GST paid to a super stockist?
Yes, a reseller will be eligible to get ITC for the GST paid while buying goods from a super stockist. The input tax credits can be used to offset the reseller’s GST liability. In the above example, the reseller originally bought the 100 biscuit cartons at Rs. 35 each, so the total for that purchase was Rs. 3500 and the reseller paid Rs. 167. The reseller can claim ITC for this GST amount, offsetting his GST liability of Rs. 214 and leaving only Rs. 47 payable to the government.
Note: all prices mentioned in the example are inclusive of taxes.
Should a reseller pay GST on sales value or on their profit margin?
A reseller will pay GST on sales (i.e., the invoice amount for the customer). It’s not necessary to pay GST on the profit margin earned in B2B transactions; the profit margin is taxed through tax deducted at source (TDS) instead.
Discounts and Freebies:
What happens to the GST levied on the value of supply if the supplier gives a discount?
If a supplier of goods offers discounts to its customers, then the value of supply can be calculated as the original value of the goods minus the discount amount. (Actual Value of Supply = Original Value - Discount.) The GST is levied upon the actual value of supply, not the original value. (*GST = Rate * Actual Value of Supply*)
Let’s say a vendor sells televisions at Rs. 50,000 each. During the festive season, he offers a 10% discount on his televisions. So when a customer buys a television during the seasonal sale, the actual Value of Supply is calculated in this way:
Actual Value of Supply = Original Value - Discount
Original Value = 50,000/-
Discount = 10% of 50,000 = 5,000/-
Actual Value of Supply = 50,000 - 5,000 = Rs. 45,000/-
So if the GST rate is 12% for this transaction:
*GST = Rate * Actual Value of Supply*
Rate = 12%
Actual Value of Supply = 45,000/-
GST = 12% of 45,000 = Rs.5,400/-
The amount to be paid by the customer is the actual value of supply plus the GST. In this case, the customer will pay 45,000 + 5,400 = Rs. 50,400/-.
Should free goods or samples given to clients be taxed in an invoice?
Yes, any free goods or services provided to your clients should be taxed and invoiced. Here, the Open Market Value of the free item will be taken as the taxable amount.