For exports, invoices may be issued in foreign currencies. In such cases, the value of the supply for calculating IGST must be converted using the exchange rate published by the Reserve Bank of India (RBI). The same rate applies for imports when reverse charge is applicable.
Introduction
Goods and Services Tax (GST) aims to unify multiple taxes into one, creating a “One Nation, One Tax” system. One crucial aspect is the valuation of supply under GST. This blog explains how to determine the value of goods or services under GST, which forms the basis for calculating the tax.
What is the Valuation of Supply under GST?
Under GST, the value of supply refers to the price at which goods or services are supplied. GST is calculated on this value. The primary basis for valuation is the transaction value, which is the price paid or payable for the goods or services when sold to unrelated parties.
Here’s what is included in the value of supply under GST:
- Taxes and Charges:
- Any taxes, duties, cess, fees, or charges imposed under any act, except GST itself, are included. However, GST Compensation Cess, if charged separately, is excluded.
- Additional Costs:
- Any costs incurred by the recipient of the goods or services that the supplier is liable to pay but are not included in the price must be added to the value.
- Incidental Expenses:
- Costs related to the sale, such as packing, commission, etc., are included in the value of supply.
- Subsidies:
- Subsidies linked to the supply, except for government subsidies, are included.
- Penalties and Fees:
- Any interest, late fee, or penalty for delayed payment is included in the value.
Example
To illustrate, let’s consider a retailer, Alex, selling a high-quality office chair. The Manufacturer’s Retail Price (MRP) of the chair is ₹10,000, but Alex offers it at ₹7,500 to his customers.
Old Tax Regime:
Under the previous tax system:
- Office Chair: ₹7,500
- Excise @ 12.5%: ₹937.50
- Subtotal: ₹8,437.50
- VAT @ 14.5% (on subtotal): ₹1,223.44
- Total: ₹9,660.94
New GST Regime:
Under GST, the value of supply is the transaction value, which is ₹7,500 in this case. Assuming CGST is 9% and SGST is 9%:
- Office Chair: ₹7,500
- CGST @ 9%: ₹675
- SGST @ 9%: ₹675
- Total: ₹8,850
Discounts
Discounts are treated differently under GST:
- Pre-Supply Discounts: Discounts offered before or at the time of supply can be deducted from the transaction value.
- Post-Supply Discounts: Discounts provided after the supply can be deducted only if certain conditions are met. For more information, refer to the detailed section on discounts in GST.
Valuation for Transactions in Foreign Currency
For exports, invoices may be issued in foreign currencies. In such cases, the value of the supply for calculating IGST must be converted using the exchange rate published by the Reserve Bank of India (RBI). The same rate applies for imports when the reverse charge is applicable.
Conclusion
Understanding the valuation of supply under GST is crucial for accurate tax calculation and compliance. It involves calculating the transaction value, adding any applicable taxes, costs, and fees, and handling discounts appropriately. For transactions involving foreign currencies, the RBI exchange rates must be used. Accurate valuation ensures correct GST payments and avoids potential issues with tax authorities. Get in touch with Vakilsearch to know more.
