Value of Supply - Related Party Transactions under GST

To regulate the value of supply under GST for the free market transactions, the Government of India (GoI) implemented guidelines for the valuation of goods and services. The guidelines shall regulate invoicing or distortion in the value of supply for the related party. The implementation of the guidelines shall result in a regulated and accountable

GST transaction between the buyer and the seller. This article details on determining the value of supply, related parties under GST and other details related to transactions for a value of supply

Related Party under GST

The following

Such persons are officers or directors of one another’s businesses;
Persons legally recognised as partners in business;
Such persons are employer and employee;
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;
One of them directly or indirectly controls the other;
A third person directly or indirectly controls both of them; (vii) together they directly or indirectly control a third person; or
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 are also referred to as related persons or distinct persons under GST.

Related Party Transaction-Value of Supply

It is 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- Transaction 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, the related party shall ensure that all associated rules apply during the transactions if the transfer made for the supply not wholly in money. During those circumstances, the related party shall follow the following:

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

The open market value of such supply;
At the time of supply, any transaction of the amount in full or any further transaction equivalent to the value, but not in money, during unavailability of the open market,
During unavailability of the open market, the total amount transferred in full for the value of the supply of goods or any transfer involved other than money equivalent to the value of the supply of goods or services,
If the value of supply is not determinable as per the above three conditions, then the 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

The value for the supply of goods or services or both shall apply at 110% for the cost involved for production, manufacturing, acquisition of such goods or provision of such services if the goods or services or both left unclassified in any of the rules prescribed in the procedure for determining the value of supply under GST.

Determining Value of Supply under GST

Value of Supply - Related Party Transaction or Distinct Persons

The calculation for the value of the supply of goods or services or both made through an agent and not between distinct persons or related parties, shall apply as:

The open market value of such supply,
If the open market value is not available, be the value of the supply of goods or services of like kind and quality,
If the value is not determinable under the above two methods, then the value as determined by the cost method or residual method,
Besides, if the recipient intends to further the supply of goods to a customer (not related to the supplier) and the supplied value of the goods equals 90% of the price charged for the supply of goods, such as in variety and quality,
The recipient shall consider the value declared in the invoice as part of the open market value of goods or service if the recipient receives full eligibility to avail input tax credit(ITC).

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Frequently Asked Questions

Common questions about Value of Supply in Related Party Transactions under GST.

Under GST, a related party transaction refers to a transaction between two parties that have certain relationships defined by the GST law, such as being officers or directors of each other's businesses, partners, employer-employee, or having control over each other. The value of supply in such transactions needs to be determined as per specific rules to prevent distortion or undervaluing.

If the consideration for the supply of goods or services between related parties is not wholly in money, the value of supply should be determined as per the following order of rules: open market value, value of equivalent money at the time of supply, value determined by cost or residual method if open market value is not available.

The cost method is used when the value of supply cannot be determined by other prescribed methods. Under this method, the value of supply of goods or services is calculated as 110% of the cost of production, manufacturing, acquisition, or provision of such goods or services.

In transactions between an agent and principal who are not related parties (distinct persons), the value of supply is determined as per the following order of rules: open market value, value of supply of like kind and quality, value determined by cost or residual method, or 90% of the price charged by the recipient for further supply to an unrelated customer, provided the recipient is eligible for full input tax credit.

Determining the value of supply correctly in related party transactions is crucial to prevent distortion or undervaluing of the transaction value, which could lead to underpayment of GST. It ensures that the GST is calculated and paid based on the fair market value, promoting transparency and preventing tax evasion.

Under GST, related parties include individuals or legal entities that have certain relationships defined by the GST law, such as officers or directors of each other's businesses, partners, employer-employee, direct or indirect control or ownership of voting stock or shares, control by a third party, or members of the same family.

Yes, the GST law prescribes specific rules for determining the value of supply in transactions between related parties and distinct persons (not related parties). The rules differ based on whether the transaction is wholly in money, not wholly in money, or between an agent and principal.

The residual method is an alternative method used to determine the value of supply when other prescribed methods, such as open market value or cost method, cannot be applied. It involves considering the total consideration in money and any further amount in money equivalent to the consideration not in money.

The purpose of regulating the value of supply in related party transactions under GST is to prevent distortion or undervaluation of the transaction value, which could lead to underpayment of GST. It aims to ensure that the GST is calculated and paid based on the fair market value, promoting transparency and accountability in the tax system.

The GST law may provide specific provisions or exceptions for determining the value of supply in certain types of related party transactions, such as transactions involving intra-group services, cross-border transactions, or transactions involving specific industries or sectors. It is essential to consult the relevant GST laws, rules, and guidelines for accurate determination of the value of supply in such cases.