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Valuation in GST Regime

MARCH 06, 2017

By G Mohana Rao, Assistant Commissioner (Retired)

VALUATION is fixed and controlled by market dynamics. The price at which any goods or service are to be sold has to be decided by business depending on various internal as well as external factors. The internal factors include costing, overhead expenditure,expected profit margins, marketing expenses etc. The external factors consist ofregulatory challenges, taxes, fees, industry margins, market forces, competition, demand-supply situation etc. More often than not, company may not have much control over the prices at which the goods or services are sold. A company may choose to close its operation if business is not worth the effort and is unsustainable.

From taxation point of view, in general, the valuation shall not be an issue since the valuation is based on transaction value,thedepartment will usually accept the transaction value except for the apparently dubious transactions, for which elaborate procedures as outlined in Section 15 of the Model GST Laws and GST Valuation Rules will have to be followed. The department usually does not value a transaction but it tries to see the circumstances around the sale to ensure that the supply is conducted at an arm's length and no extraneous factors influence the declared value.

However, Inter-state, branch supplies (or inter-state self-supplies) shall be taxable in the GST regime. This has huge implication for the companies as well an opportunity. The companies, trade bodies, associations and consultants are looking for ideas as to how department will value such transactions. In the GST regime, its self-assessment. The taxable person has to self-assess every supply and file appropriate returns. In inter-branch transaction, obviously there would be no transaction. The taxable person will be expected to value the transaction under self-assessment. The transaction would always be under threat of challenge by the taxation authorities.

Another concern being raised by the companies is accumulated credit which may get clogged in some states while they would be required to pay GST in cash in other states. Various trade associations haveapproached the government to allow credit of CGST in one State to be used in other States on the pretext that it is central tax and will have no impact on the revenue. Accumulation of unutilized credit is being touted as a real concern by the trade bodies.

Government appears to have very few options. However, most of the concerns appear to be unfounded. It is felt that valuation policy by companies can very well take care of such situations.

Let me explain this.

GST is destination based consumption tax. Is it so? Where is it written? No, it is not mentioned anywhere in the Constitution Amendment Act or in the model GST Law- earlier orin the revised version. It is it not even in the draft rules. Yet, every authority appears to start their explanation of GST by saying that it is destination based consumption tax.

Whether GST is indeed a destination based consumption tax will actually be decided by the fact whether there is unutilized credit anywhere or not. It will be determined by the quality of place of supply provisions. In an ideal scenario, in a perfect destination based consumption tax, taxes would move along with the supply to its place of consumption. There is no scope for accumulation of credit anywhere.

The companies can devise their valuation models (Inter-branch supplies) in such a way that there is no accumulation of credit. If the companies correctly value their inter-branch transaction, no credit of ITC would accumulate. If any credit is accumulated, it is a sign of faulty valuation model. Nothing else. The only other possibility of credit accumulation is an “ inverted duty structure ” for which refund mechanism is already present in GST.

In the next few years,when the disputes pertaining to valuation of such transactions reaches judicial forum, some courts in their wisdom would give orders on these principles. These principles are not outlined in the law in so many words. However, the same can easily be derived from the conceptual understanding of GST.

Under the circumstances, Advance Ruling can play huge role in the scenario. As soon as the law is framed, Authority for Advance Rulings should be established so that the companies can seek rulings on such questions so as to bring certainty, finalityand credibility in the GST regime.

(The author is Partner, Elysian Tax Advisors and the views expressed are strictly personal)

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