VALUATION OF DEEMED TRANSACTION UNDER GST
There are certain transaction for which even though consideration is not received will be treated as supply. According to GST Schedule I, Transactions between related persons and other activities of the schedule will be treated as supply even if made without any consideration.
Such type of transactions is mostly between parties which are related or between an agent and a principal. The parties pay GST and can later claim it as input tax credit.
We will see following things in the article:
- Who is related under GST?
- Valuation of such transaction
- Treatment for Importing Services/Goods from Related Person
- Permanent transfer of Business without Consideration
- Who is a related person under GST?
Persons shall be deemed to be related if they fall under any of the categories below:
- Officer/ director of one business is the officer/ director of another business
- Businesses are legally recognised as partners
- An employer and an employee
- Any person holds at least 25% of shares in another company either directly or indirectly
- One of them controls the other directly or indirectly
- They are under common control or management
- The entities together control another entity
- They are members of the same family
Persons include a legal person who can be individuals, HUF, company, firm, LLP, co-operative society, body of individuals, local authority, government etc or an artificial juridical person. It also includes entities incorporated outside India.
Persons who are associated with one another’s business or is a sole agent or sole distributor or sole concessionaire shall be deemed to be related.
- Valuation of transactions between related persons?
Value of supply between related persons (other than that where the supply is made through an agent) are determined as below:
- Open market value of such supply-
Open market value is the value of the supply between two unrelated entities. When a supply is between two related entities, there is a high possibility that the prices will be influenced by their relationship.
For example, Mr. Rohit Ltd sells goods to GDPS Ltd (related entity) at Rs. 15000 and to Bhushan Ltd (unrelated entity) at Rs. 25000 In this case, we can see that the relationship has influenced the pricing of Rohit Ltd. Hence, for the purpose of valuation, Rs. 25000 will be considered.
- If the open market value cannot be determined, then, value of goods of like kind and quality shall be considered.
For example, If Madhu Ltd was making entire sales to Charu Ltd, then the above method of valuation would not be appropriate. Then, we could consider White Ltd who sells similar goods as Madhu Ltd at Rs. 20000. Hence, the valuation for this purpose would be Rs. 20000.
- If both are unable to apply, then a value based on cost(total cost of production) or under the residual method. Is required to be done.
- Treatment for Importing Services/Goods from Related Person:
If any Import of services are made by a taxable person from a related person or from any of his other establishments outside India, then for business purposes, it will be treated as supply.
For example, PQR Inc. is incorporated in the China by XYZ Ltd. along with ABC Ltd. in India. Services are imported by ABC Ltd from PQR Inc. without any consideration, the import will be deemed to be a supply. GST will be paid by B Ltd. on reverse charge basis.
- Permanent Transfer of Business Without Consideration:
According to Schedule-I, Permanent transfer or sale of business assets on which input tax credit has been availed will also be treated as supply even if there is no consideration received. GST is required to pay on such type of transaction. GST is applicable to the sale of business assets only.
Note: It does not apply to the sale of personal land/building and other personal assets.