Value of Supply – Related Party Transactions under GST

The value of supply in a free market transactions where the two parties (i.e. Buyer and Seller) involved in a transaction are not related would be at arms-length or fair market value. However, when a commercial transaction happens between two related parties under GST, the value of supply could be distorted leading to lower GST payable to the Government. To prevent under invoicing or distortion of value of supply amongst related party, the Value of Supply rules provide guidelines for valuation of goods or services.

Related Party under GST

Under GST, related parties are:

1. Such persons are officers or directors of one another’s businesses;
2. Such persons are legally recognised partners in business;
3. Such persons are employer and employee;
4. Any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
5. One of them directly or indirectly controls the other;
6. Both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or
7. They are members of the same family;

Under GST, the term “related parties” also includes legal persons and persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, of the other. Further, related parties is also referred to as related persons or distinct persons under GST.

Read about related parties transaction as per Companies Act, 2013.

Related Party Transaction – Value of Supply

Its important to consider two rules defined in the rules for Determination of Value of Supply, while calculating the value of supply between related parties.

Value of Supply – Consideration is not Wholly in Money

In a lot of related party transaction, the consideration for the value of supply of goods and/or services might not be paid wholly in money. Hence, its important to ensure that in all related party transactions, the rules concerning value of supply where the consideration is not wholly in money, is followed:

When the supply of goods or services is for a consideration not wholly in money, then value of the supply should be calculated as:

• The open market value of such supply;
• If open market value is not available, be the sum 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;
• If the value of supply is not determinable as per the above two conditions, then the value of supply of goods or services should be based on like kind and quality;
• If the value of supply is not determinable as per the above three conditions, then the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the cost method or residual method.

Cost Method for Determining Value of Supply under GST

Where the value of a supply of goods or services or both is not determinable by any of rules prescribed in the procedure for determining value of supply under GST, the value should be taken as 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.

Value of Supply – Related Party Transaction or Distinct Persons

The value of the supply of goods or services or both between distinct persons or related parties, other than where the supply is made through an agent, should be calculated as:

The open market value of such supply;

If open market value is not available, be the value of supply of goods or services of like kind and quality;

If value is not determinable under the above two methods, then the value as determined by cost method or residual method.

Also, if goods are intended for further supply as such by the recipient, then the value of supply an amount equivalent to 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. Finally, if the recipient is eligible for full input tax credit, then the value declared in the invoice should be deemed to be the open market value of goods or service.

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