Until now, dealings involving related parties have been a subject of particular scrutiny by government and tax authorities due to the suspicion that these transactions might have motives beyond mere profit generation. In an effort to prevent tax evasion in such scenarios, various safeguards have been incorporated into tax laws, including provisions like transfer pricing regulations and section 40(A)(2), as introduced in the Income Tax Act. Similarly, the GST (Goods and Services Tax) regime has introduced specific provisions that impact transactions between business owners and related parties.
Distinct Persons:
Under the CGST (Central Goods and Services Tax) Act, establishments that have acquired separate registrations are considered as 'distinct persons.' It is important to note that these separate registrations can be obtained for establishments within the same state or in different states. Additionally, according to the IGST (Integrated Goods and Services Tax) Act, establishments in India and those outside India are treated as 'distinct persons.'
Related Persons:
The definition of 'related persons' as per the CGST Act encompasses various relationships, such as officers, directors of a business, business partners, employer-employee connections, ownership interests exceeding 25%, controlling interests, common control, and family members. The definition also includes exclusive agents, distributors, or concessionaires within the scope of related persons.
Impact of Transactions with Related Persons/Distinct Persons:
Under the GST Act, it is specified that supplies made without consideration to related persons or distinct persons are still subject to GST. This means that GST must be charged even when no consideration is involved in such transactions. Consequently, even the straightforward transfer of goods between different branches of the same entity falls under the purview of GST.
The question then arises:
What value should GST be charged on? To address this, the government has established valuation rules. According to these rules, regardless of the transaction's value (whether with consideration or without), the value for GST purposes is determined as follows:
Analysis:
From the options provided for valuation, it becomes clear that business owners must conduct careful analysis and maintain comprehensive documentation to demonstrate that related party transactions are not manipulated. Determining the open market value of goods is similar to the internal Comparable Uncontrolled Price (CUP) method in transfer pricing provisions under income tax regulations.
However, in the services industry, comparing the value of services can be challenging due to various influencing factors. Similarly, determining the value of goods and services of 'like kind and quality' involves finding broad comparables when exact matches are unavailable, often requiring adjustments to make them relevant for valuing related party transactions.
While the cost of producing goods may be readily available to traders and manufacturers with proper record-keeping, service providers may face difficulties in determining the precise cost of services provided to related parties. In such cases, service providers may accumulate costs in appropriate cost centers and allocate them using appropriate allocation methods.
In situations where it's not possible to determine value through the aforementioned means, the term 'reasonable means consistent with general principles and provisions' comes into play. Although this phrase may seem subjective, adopting methods prescribed under transfer pricing provisions in the income tax regulations, such as the CUP method, can establish that the transaction is conducted at an arm's length price. Utilizing scientifically recognized methods endorsed by another legislative body, coupled with robust documentation, can strengthen a party's position in the event of legal disputes.
CA Yaman Garg
Bijender Garg & Associates
Comment: