Valuation of Supply – Principal To Agent and Vice Versa
Goods and Service Tax (GST) has been a game-changer in the Indian tax regime, and its introduction has brought about the concept of "One Nation, One Tax." The GST charges tax based on the transaction value. Transaction value refers to the price paid or payable for the supply of goods and services between unrelated expenses, which is the sole consideration for the supply. One of the essential aspects of GST is the valuation of supply between the principal and the agent.
Valuation of Supply of Goods Made or Received Through an Agent
The GST valuation standards specifically cover supplies between the principal and the agent or vice versa. It is essential to understand that any supply from the principal to an agent or vice versa attracts GST. Both parties must adhere to these valuation rules to avoid disputes with tax authorities.
The value of supply is the custom value of the imported goods plus the import duty paid. (Custom Value + Import Duty = Value of Supply) The value of taxable supply on an imported service is the total consideration times the taxable percentage. (Value of Taxable Supply = Total Consideration X Taxable Percentage).
Types of valuation methods (cost-based, market-based, income-based)
Business or asset valuation methods determine the value of a business or asset. There are three main types of valuation methods:
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Cost-based
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Market-based
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Income-based.
Cost-based valuation method
This method involves determining the value of an asset by adding up all the costs associated with acquiring or creating it. It considers the cost of raw materials, labour, and other expenses related to the asset's production. Valuers commonly use the cost-based approach to value assets such as real estate, equipment, and inventory.
Market-based valuation method
This method involves determining the value of an asset by comparing it to similar assets recently sold in the market. Valuers commonly use the market-based approach to value publicly traded stocks and real estate properties. This method requires a good understanding of the market and access to reliable data on recent sales of similar assets.
Income-based valuation method
This method involves determining the value of an asset based on its expected future cash flows. Valuers commonly use the income-based approach to value businesses and investments. This method estimates the asset's future cash flows and discounts them back to their present value using a discount rate. Valuers typically base the discount rate on the risk associated with the asset and the expected rate of return.
Each valuation method has its strengths and weaknesses, and the appropriate method for valuing an asset and the purpose of the valuation will depend on the type of asset.
Who is a Principal?
In supply valuation, a "Principal" refers to someone on whose behalf an agent carries on a business of supply or the recipient of goods or services or both. For instance, a retail store of an automobile company is an example of a principal-agent relationship.
Who is an Agent?
The definition of an "Agent" in the context of supply valuation under the GST law in India includes a person, such as a factor, broker, commission agent, del credere agent, auctioneer, or any other merchant agent, who conducts the business of supplying or receiving goods or services or both on behalf of another person.
Section 1(5) of the Central Goods and Services Tax, 2017 defines an "Agent" as such a person. A DelCredere agency is a principal-agent relationship in which the agent acts as the principal's salesperson or broker and guarantees the buyer's credit.
What is the Principal and Agent Relationship?
The relationship between the principal and the agent has been elaborated in detail in Schedule 1 of the CGST Act, 2017, vide circular no-57/31/2018-GST dated 04/08/2017. According to the provisions of Schedule 1 of the Central Goods and Service Tax, 2017, the act of an agent providing goods on behalf of the principal without any consideration is considered a supply.
Branches of Any Supply Under GST
There are two branches of any supply under GST - consideration and supply of goods. The reference is not binding in any transaction and does not fall within the scope of any supply. However, the supply of goods is considered in specific scenarios as provided in Schedule 1 of the CGST Act.
The following scenarios are a part of Schedule 1 of the CGST Act:
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According to the principal are deemed to have supplied goods to the agent when they hire them to provide items on their behalf.
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According to an agent agreeing to accept products on behalf of the principal, the agent has supplied goods to the principal.
It is crucial to understand that not all transactions between a principal and an agent or vice versa fall under the specified entry's scope. For instance, the provision of services between the principal and the agent, and vice versa, falls beyond the purview of the preceding item and, therefore, calls for "consideration" to be considered a provision of services. The final GST calculation would be affected by this. Moreover, the article has shortened the phrase "supplier or recipient of products on behalf of the principal," which is part of the definition of an "agent."
The Course of Furtherance of Business
Section 7 of the CGST Act 2017 defines the scope of supply valuation under GST. Sub-section (1), clause (a), states that "supply" refers to any exchange of goods or services for money in the course or advancement of business. The goods and services tax law applies to the supply of goods, services, and supplies made by the principal to his agent or agent to his principal, even if such transactions do not contain any consideration for the supplies.
Factors Affecting Valuation of Supply
Demand and supply conditions
The valuation of a supply is influenced by various factors, with demand and supply conditions being among the most significant. These two factors can impact the value of the supply by influencing its level of demand and availability in the market.
Demand and supply conditions are two key factors that can affect the valuation of supply:
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Demand conditions: The demand for a particular supply can impact its value. If the demand for the supply is high and exceeds the available supply, the value of the supply is likely to increase. Conversely, if the demand for the supply is low, the value of the supply may decrease. Other factors impacting demand include consumer preferences, market trends, and the economic environment.
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Supply conditions: The supply of a particular asset can also impact its value. If the supply is limited and cannot meet the demand, the value of the supply is likely to increase. Conversely, if the asset is over-supplied, the supply value may decrease. Other factors that can impact supply include changes in production costs, availability of raw materials, and changes in regulations.
It is important to note that demand and supply conditions can be interdependent. For example, if demand for a particular supply increases, producers may increase their supply to meet the demand, which could result in a decrease in value due to oversupply. Alternatively, if supply decreases due to production constraints, the value of the supply may increase due to limited availability.
Market competition
Market competition can be affected by the factors that impact the valuation of a supply, such as demand and supply conditions. If there is a high demand for a particular supply and a limited supply available, this can lead to increased competition among buyers, driving up the price. On the other hand, buyers may have more bargaining power if the supply exceeds demand, leading to lower prices and increased competition among sellers. Changes in production costs, availability of raw materials, and regulations can also impact market competition by affecting supply and pricing. Overall, understanding the factors that affect the valuation of a supply can help businesses make strategic decisions to compete effectively in the market.
Regulatory and legal environment
The regulatory and legal environment is essential when valuing a supply, as it can impact its availability and pricing. Regulations can influence a supply's production, distribution, and pricing, limiting availability and increasing production costs. Legal issues, such as patent infringement or disputes, can also affect the value of a supply by limiting its marketability or growing legal costs. Additionally, changes in regulations or legal rulings can affect the demand for a supply, potentially increasing or decreasing its value. Businesses must consider the regulatory and legal environment when valuing a supply, which can significantly impact its marketability and profitability.
Negotiation power of principal and agent
Factors that affect the valuation of a supply can influence the negotiation power of the principal and agent. If the supply is in high demand and limited supply, the principal may have more negotiation power over the agent, as the agent may be willing to pay a higher price to secure the supply. Conversely, if the supply is readily available and demand is low, the agent may have more negotiation power and be able to secure the supply at a lower price.
Other factors that can influence the negotiation power of the principal and agent include the regulatory and legal environment and the competitive landscape. If regulations limit the availability of the supply, the principal may have more negotiation power due to the limited availability of the supply. Additionally, if there are few competitors in the market, the principal may have more negotiation power, as the agent may have limited supply options.
Conclusion
The "One Nation, One Tax" concept has been introduced by the Goods and Service Tax (GST), according to which the transaction value for the supply of goods and services between unrelated expenses. Valuation of supply between the principal and the agent is an essential aspect of GST. The principal refers to a person on whose behalf an agent carries on a business of supply or the recipient of goods or services or both. In contrast, an agent is a person who carries on the business of stock or recipient of goods or services on behalf of any other person. It has a supply when an agent provides goods on behalf of a principal without receiving any consideration. There are three main types of valuation methods: cost-based, market-based, and income-based. Various factors influence supply valuation, including demand and supply conditions, market competition, and the regulatory and legal environment. The supply's demand and supply conditions affect the principal and agent's negotiation power.