Valuation Guidelines for GST Transactions Between Related Parties

To ensure accuracy and fairness in GST transactions within the open market, the Government of India (GoI) has established comprehensive guidelines for valuing goods and services. These guidelines aim to regulate invoicing practices and prevent distortions in the valuation of supply, especially in transactions involving related parties. By implementing these guidelines, GST transactions between buyers and sellers can be conducted in a regulated and transparent manner. This article provides insights into the determination of the value of supply, the concept of related parties under GST, and other key aspects related to transactions and their value.

Defining Related Parties under GST

Under GST, the term "related parties" encompasses various relationships, including:

1. Officers or directors of each other's businesses.
2. Legally recognized partners in business.
3. Employer-employee relationships.
4. Ownership interests where one party directly or indirectly owns, controls, or holds 25% or more of the outstanding voting stock or shares in both entities.
5. Direct or indirect control of one entity by another.
6. Indirect control of both entities by a third party.
7. Joint control of a third party by both entities.
8. Membership in the same family.

Furthermore, under GST, related parties also encompass legal entities and individuals associated in each other's business, where one party serves as the sole agent, distributor, or concessionaire of the other. In this context, they may be referred to as related persons or distinct persons under GST.

Valuing Related Party Transactions

Calculating the value of supply in related party transactions involves considering two important rules outlined in the Determination of Value of Supply rules:

1. Value of Supply in Transactions not Wholly in Money

In many related party transactions, the consideration for the supply of goods and/or services may not be fully paid in money. In such cases, the following considerations apply:

• The open market value of the supply.
• The transaction amount, in full or equivalent, during times when the open market value is unavailable.
• The total amount transferred, either in full or in money equivalent, for the value of the supply when it is not determinable through the previous methods.
• If none of the above conditions apply, the value should be calculated as the total consideration in money, including any money equivalent to non-monetary consideration, determined through the cost method or residual method.

2. Cost Method for Determining Value of Supply under GST

When goods or services are not classified under any prescribed rules for determining the value of supply under GST, the value shall be taken at 110% of the cost incurred for production, manufacturing, or acquisition of such goods or provision of such services.

Value of Supply in Related Party Transactions or Transactions Between Distinct Persons

For determining the value of the supply of goods or services when an agent is involved, and it is not a transaction between distinct persons or related parties, the following considerations apply:

• The open market value of the supply.
• If the open market value is unavailable, the value of the supply of goods or services of a similar kind and quality.
• If the value cannot be determined using the above methods, the value should be determined through the cost method or residual method.
• Additionally, if the recipient intends to further supply the goods to a customer (not related to the supplier) and the value of the supplied goods equals 90% of the price charged for the supply of goods, such as in variety and quality, the recipient should consider the value declared in the invoice as part of the open market value of goods or services, provided the recipient is eligible to claim input tax credit (ITC).