How To Determine Value Of Supply When Consideration Is Not Wholly In Money?

Determining the Value of Supply is an essential aspect of the Goods GST system in India. In some cases, businesses may receive consideration that is not wholly in the form of money, such as barter transactions or payments in kind. In such scenarios, it becomes essential to accurately determine the Value of Supply to comply with GST regulations, calculate the correct tax liability, and claim tax credits appropriately. This article summarises how to determine the Value of Supply when consideration is not wholly in money, to help businesses understand this aspect of GST compliance.

Cases Where Consideration is Not Wholly in Money

Sometimes, businesses create innovative payment schemes where customers must pay partial cash and the remainder in other forms of consideration, such as exchanging a second-hand product for a new one.  In such scenarios, the value of supply shall be:

• Suppose the Open Market Value (OMV) is available. In that case, the value will be the full amount of money paid by the buyer at the time of supply, excluding GST, assuming that the transaction was between unrelated parties.
• If the OMV is unavailable, then the value will be the sum of the money paid in consideration and the monetary value of any non-monetary conditions.
• If neither the first nor the second option can be applied, the value will be determined based on the monetary value of a similar product or service.
• A similar product or service must have similar characteristics, quality, quantity, or functionality.
• Suppose none of the above methods can be used to determine the value of the supply. In that case, it will be based on either the cost of supply plus a 10% markup or the best judgment method, which involves using reasonable means consistent with the principles and provisions of GST law.

Open Market Value of Supply

Open Market Value of Supply refers to the market value of goods or services supplied or traded in the open market without special conditions or discounts. It is the price that a buyer would pay to a seller in a transaction that is conducted in a fair and open manner, without any coercion or special circumstances that might influence the price.

In the context of taxation or accounting, the Open Market Value of Supply is often used to determine the value of goods or services subject to taxation or other financial calculations. It is considered to be an objective measure of the value of a product or service based on market forces and supply and demand dynamics. 

For example, a refrigerator is supplied at Rs. 30,000 to exchange for an old refrigerator. If the price of a refrigerator without exchange is Rs. 35,000, then the open market value will be Rs. 35,000, and the GST will be levied on that value.

Sum Total of Consideration in Money and Monetary Value of Consideration Not in Money

The valuation method is applicable when the open market value of goods and services is unavailable. The money received is added to the monetary worth of the goods or services received to determine the taxable value. 

Taxable Value=Consideration In Money+Monetary Value of Consideration Not In Money

For Example, A company supplies a new washing machine to a loyal customer before its launch for Rs. 30,000 and an offer to exchange for an old washing machine. The value of the old machine at the time of supply is Rs. 5000, but the open market value of the machine is not available.  

The company cannot apply the transaction value to arrive at the taxable value as the price is not the sole consideration. Since the market value is unavailable, the open market value also cannot be used. The taxable value is the sum of cash consideration received and the monetary value of goods or services obtained. Hence the taxable value of machines will be:

Consideration In money 30,000 + Monetary Value Of washing Machine is Rs. 5000= Rs. 3500

Value of Supply of Goods/Services of Kind And Quality

This method is applicable when the open market value of goods or services is unavailable, and the value cannot be determined by applying consideration in money. The monetary value of consideration is not in money. In such a case, the value of the supply of goods/services will be determined based on the price of products of the “like kind and quality” of the product being supplied. The value of products of the “like kind and quality” is determined by considering factors like goods and services provided should have the same characteristics, quality, quantity, functional components, materials, and reputation, or they must closely or substantially resemble goods or services in question. 

For Example, A company has introduced a new product, a makeup organiser, offered to customers as part of a product promotion. In this case, the product is still being developed; the value in this scenario cannot be established by using the “Open Market Value approach” or by valuing the consideration in terms of money because it does not have a monetary value. In this case, the last method of comparing with a product of ‘like kind and quality can be applied to determine the value. 

The company has a product sold at Rs. 5000 with a similar configuration, functionalities, and additional functions. Hence the value of the organiser is Rs. 5000 for tax assessment. 

The supply value will be determined using either the residual technique or the product cost plus 10% if the abovementioned method cannot be used for whatever reason.

Conclusion

Determining the value of a supply when consideration is not wholly in money requires careful consideration of all the non-monetary components involved. It is essential to accurately evaluate the worth of such components to arrive at an appropriate value for the supply, ensuring that all parties involved are satisfied with the transaction.