Introduction
Taxation is one of a country’s key sources of revenue. In India, GST is in practice to fulfil this role. It is a unified taxation policy that replaced numerous indirect taxes in India. One of the major factors on which the GST system depends is its valuation. Therefore, the government has devised various rules to ensure taxation is free from loopholes.
Understanding these GST valuation rules can be challenging for a normal person, as they are technical in nature. Therefore, this article will discuss one such rule in detail. Read on to learn about the various aspects of Rule 28!
Basics of Rule 28 in GST Valuation
Rule 28 in GST valuation guidelines governs the evaluation of the value of a supply of goods or services between separate or related people, except transactions conducted via an agency. Here are the basics of Rule 28:
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Applicability
Rule 28 applies when products or services are supplied between different people as described in subsections (4) and (5) of section 25 or where the provider and recipient are related.
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Methods of Valuation
Some of the valuation methods under GST are:
- The value of the supply should be the open market value if available.
- If open market value is unavailable, the value should be determined by the supply of commodities or services of comparable type and quality.
- If the value cannot be established by (a) or (b), it should be determined by Rule 31 or Rule 30, in that order.
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Option for Supplier for Further Supply
Suppose the goods are intended for further supply by the recipient. In that instance, the supplier may claim the value to be 90% of the amount charged by the recipient for the delivery of equivalent items to an unrelated client.
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Input Tax Credit Consideration
If the recipient is qualified for full input tax credit, the amount stated on the invoice is considered the open market value of the goods or services.
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Deemed Value for Corporate Guarantee Services
In the case of services provided by a supplier to a related recipient through a corporate guarantee to a banking company or financial institution, the value is deemed to be one per cent of the amount of the guarantee offered or the actual consideration, whichever is higher.
Also Read: Demystifying Rule 42 Of GST Valuation Rules
Comprehending Specific Aspects of Rule 28 of GST Valuation
Comprehending specific aspects of Rule 28 in GST Valuation guidelines involves a detailed understanding of concepts. Some of them are listed as follows:
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Definition of “Similar Goods/Services”
Determining “similar goods/services” under Rule 28 can be tricky. Here’s how to approach it:
- Consider physical characteristics: Compare the material, size, functionality, brand, and other relevant physical attributes.
- Evaluate quality and performance: Assess the technical aspects, durability, efficiency, and overall performance of the goods or services.
- Market context: Analyse the prevailing market conditions and how these factors influence pricing for similar offerings.
- Substitute products: Evaluate whether other products can serve the same purpose or fulfil the same need as the supplied goods or services.
Remember, the aim is to find the closest possible match regarding characteristics, quality, and market presence. If a perfect match is unavailable, choose the most representative alternative while documenting the rationale behind your selection.
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Application of the Resale Option
The resale option is beneficial when:
- Goods are meant for further supply without any significant transformation or value addition.
- The recipient can provide clear evidence of the price they charge to their unrelated customers for similar goods.
- Choosing 90% of the recipient’s price aligns better with the overall market conditions.
However, consider situations where:
- The resale price might be manipulated to evade taxes.
- The recipient has limited sales data for similar goods.
- Applying the resale option leads to an unreasonable valuation compared to open market benchmarks.
In such cases, opting for OMV or other valuation methods might be more appropriate.
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Implications of Full ITC Eligibility
For recipients eligible for full ITC, the declared invoice value is deemed the OMV. This simplifies valuation as long as the declared value reflects the actual transaction price and isn’t inflated or deflated to manipulate tax liability.
However, if you suspect the declared value might not be accurate, you can still challenge it by providing evidence of alternative OMV based on other methods prescribed in Rule 28.
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Using Residual Methods
Residual methods are considered last resort options when neither OMV nor similar goods/services can be determined. Some examples are:
- Rule 30 (Cost Plus Method): The cost Plus method is generally used for unique or custom-made goods where determining OMV or similar goods is difficult. For example, if a company constructs a specialised machine for a client, the cost of materials, labour, and overhead can be used to calculate the value through the cost-plus method.
- Rule 31 (Retail Price Method): The retail price method applies when selling branded goods with established retail prices. For example, suppose a cosmetics manufacturer supplies products to a distributor. In that case, the value can be calculated by applying the specified margin (by CBIC) to the established retail price of those products.
Challenges and Interpretations of Rule 28 of GST Valuation
Challenges and interpretations of Rule 28 in GST Valuation involve exploring its various complexities. Here’s a breakdown:
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Interpretation of Applicability
Identifying distinct or related persons and understanding when the rule is applicable can be intricate, especially in cases involving complex business structures. Thus, you must thoroughly assess business relationships and structures to determine the applicability of Rule 28. You can also seek professional advice when the distinctions are not clear.
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Valuation Methodology Challenges
Selecting the appropriate valuation method from the hierarchy specified in Rule 28 poses challenges, particularly when open market value or similar goods/services are not readily identifiable. Therefore, you should carefully analyse each available valuation method, prioritising open market value.
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Documentation Complexity
Maintaining comprehensive documentation in line with the requirements of Rule 28 may become complex, especially when dealing with diverse transactions and multiple valuation methods. Thus, consider clearly outlining the chosen valuation method in the invoices issued.
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Record-Keeping Challenges
Ensuring adherence to the record-keeping requirements under Rule 49 of the CGST Rules for an extended period may pose logistical challenges for businesses. To avoid such challenges, implement efficient record-keeping systems to organise and store documents for at least 72 months.
Also Read: What Are The Rules For GST Valuation Of Stock Transfers?
Compliance and Documentation Requirements of Rule 28 of GST Valuation
Robust compliance and meticulous documentation are fundamental to exploring the complexities of Rule 28 in GST Valuation. Here are the critical elements to consider:
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Invoices
It is imperative to issue invoices that accurately reflect the determined supply value. Moreover, clearly stating the valuation method used in the invoice provides transparency and allows for easy verification.
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Supporting Documents
Gathering and maintaining supporting documents is essential to substantiate the chosen valuation method. Different methods require distinct pieces of evidence. Some of the key supporting documents include:
- Purchase orders or contracts, particularly for Open Market Value (OMV) determination.
- Market research data for similar goods or services when utilising that valuation method.
- Cost records for the cost-plus method.
- Retail price lists and applicable margins for the retail price method.
- Evidence of resale price for transactions involving the resale option.
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Adherence to Record-Keeping Rules
Adhering to Rule 49 of the CGST Rules is crucial for maintaining records systematically. Records must be kept for at least 72 months (6 years) after the due date of submitting the annual return for the relevant fiscal year. This extended period ensures that documents are available for scrutiny during audits.
Conclusion
Exploring Rule 28 of GST Valuation Rules offers a thorough guide for businesses to understand how to determine the value of supplies between distinct or related persons. Although there are numerous complications to deal with, businesses can effectively manage them by adhering to the recommended valuation methods. This becomes necessary for regulatory adherence and strategically crucial for businesses aiming at transparent financial operations.
Also Read: GST Guide – The Complete Information About GST
Frequently Asked Questions
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What do you understand by the valuation rule under GST?
In GST, the taxable value is the transaction value, i.e., the actual price paid or payable, as long as the supplier and recipient are unrelated. Moreover, the price is the sole consideration. Typically, in regular trade, the invoice value aligns with the taxable value.
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How do you calculate taxable value under GST?
GST is categorised into slabs of 5%, 12%, 18%, and 28%. To calculate GST, consider a scenario where a product/service is sold for Rs. 1,000 with an 18% GST rate. The net price is then computed as 1,000 + (1,000 * (18/100)), resulting in Rs. 1,180.
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What is the importance of valuation in GST?
GST is applicable exclusively to taxable supplies, emphasising the significance of valuing these supplies accurately. Nonetheless, the value of exempted supplies cannot be disregarded, especially in specific instances such as the payment of tax under the Composition Scheme. In such cases, understanding the impact of exempted supply on valuation becomes crucial.
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What are valuation rules?
To manually determine the invoice price, start by calculating the total value of all goods and services on the invoice. Next, deduct any applicable discounts. Include the portion for tax and shipping, resulting in the ultimate invoice price.
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What is the difference between invoice value and taxable value in GST?
Taxable Value is the amount on which GST is applicable. It represents the value without the inclusion of GST, and at this stage, GST has not been charged or added. This value serves as the base on which GST will be applied. Whereas, invoice Value is the total amount on the invoice and includes both the taxable value and the GST amount. It is the sum of the taxable value and the GST, representing the final amount that needs to be paid, inclusive of the applicable tax.
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How do you calculate invoice value?
To determine the final invoice price manually, follow these steps:
- Calculate the total amount for all goods and services listed on the invoice.
- Subtract the total amount of all discounts.
- Add the share of tax and shipping.
- The final invoice price reflects the total amount to be paid after considering goods and services, discounts, tax, and shipping costs.
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What are the main purposes of valuation?
Valuation serves another widespread purpose in financial reporting, particularly for generating annual or quarterly financial statements. Within this context, a company’s valuation becomes instrumental in establishing the fair value of its assets and liabilities, encompassing financial instruments and intangible assets. This information contributes to the accuracy and transparency of financial reporting processes.
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What is the residual method of valuation in GST?
The residual method comes into play when the value of a supply cannot be ascertained through other prescribed methods. In such cases, the determination relies on factors like the cost of production, manufacture, or the value of comparable goods or services. This method is applied as a last resort when other valuation methods are not applicable.
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What is a valuation formula?
Calculate the book value for a swift business valuation by subtracting total liabilities from total assets. This formula provides an estimate of the business’s worth by evaluating its assets and offsetting any existing liabilities.
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How do you separate GST from the total amount?
For a detailed GST calculation, follow these formulas:
Adding GST:
- GST Amount = (Original Cost x GST%)/100
- Net Price = Original Cost + GST Amount
Removing GST:
- GST Amount = Original Cost – [Original Cost x {100/(100+GST%)}]
- Net Price = Original Cost – GST Amount
These formulas facilitate the calculation of the net price after adding or removing GST from the original cost.
