GST: Valuation rules and the risk of litigation
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These are eventful days for tax consultants. They are busier than ever bracing for the GST (goods and service tax) implementation deadline of 1 July and jotting down suggestions for the draft rules put in the public domain by the GST Council, to be submitted by 10 April.
Four draft set of rules relating to composition, input tax credit, transition and valuation were approved by the council last week. While the first three are more or less on expected lines, certain aspects of the valuation rules are bothering tax experts.
Valuation rules set guidelines as to what will be the value on which GST is required to be paid on goods and services; in situations where for a particular transaction the consideration is not fully in money or where it relates to interstate stock transfer of goods or supply of services between two offices of the same company or where the transaction happens via an agent, known in the jargon as a “pure agent”.
Though the draft has some examples of how open market value (OMV) should be calculated in the aforementioned scenarios, practically implementing them for a plethora of goods and services is very challenging and likely to invite lots of litigation.
According to S.S. Gupta, editor at Taxmann, which publishes journals related to taxation, in a transaction where money is not the sole consideration, levy of tax could happen on notional value, but determining such a value will be extremely difficult, especially for services.
He further pointed out that when a good is sold in two different states, determining OMV becomes difficult because it is not necessary that it be sold at the same price in both states, as there is an affordability factor that comes into play. “All this will lead to a huge amount of show-cause notices piling up issued by the income- tax department,” he added.
The proposed rule states that when supply of goods or services happens for a consideration not being fully in monetary terms and OMV is not known, then valuation for GST levy will be determined based on the value of goods and services of like kind and quality. The term “like kind and quality” is not only vague but also subjective, and hence a matter of dispute, said tax experts.
Meanwhile, M.S. Mani, senior director at Deloitte Haskins Sells LLP says he’s puzzled at the proposal of GST being levied on transactions that happen through agents. An agent is a person who deals on behalf of two parties without having vested interest in the underlying asset.
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“It has been observed in the past that calculation of tax on a transaction becomes very difficult when a pure agent is involved. It should be noted that previously there was no mention made of taxation on such transactions and why it has been reintroduced is a mystery to us because it makes things more complex, especially for service providers,” he said.
While Mani questions the need for taxing these transactions, Anita Rastogi, partner (indirect tax) at PwC India, recommends scrapping of provisions that would make interstate transfer of stock or service between two offices of a same company a painful accounting process.
“If goods are stock transferred (and therefore taxable under GST), draft rules suggest that declared invoice will be accepted. One is not clear whether any invoice value declared by the company (as per their internal records or business practice) would be accepted by the government, or companies would need to follow cost-plus method for this purpose. Supply of services like administration support, sharing of manpower between establishments of a legal person (head office and branch offices) in different states will be subject to GST. Attributing a value to this is very difficult. This would lead to unwarranted disputes,” she explained.
A final nod to draft rules is likely at the GST council’s meeting in mid-May. One hopes that the valuation rules are further refined and sorted out, failing which companies and tax officials would be at loggerheads.