Under the Goods and Services Tax (GST) regime, transactions between related parties are subject to a special set of rules. One such rule is the determination of the value of the supply of goods or services between related persons, which can have significant implications for GST compliance and liability. This value is particularly important because it determines the amount of GST payable on such transactions. The GST law defines the term “related persons” broadly, encompassing family relationships and business connections such as partnerships and subsidiaries. Therefore, it is crucial for businesses to understand and comply with the rules regarding the value of supply between related persons to avoid penalties and legal complications. Here will explore the key aspects of the value of the supply of goods or services between related persons under GST and its importance in the context of Indian taxation.
If a business operates from multiple locations in different states, they need to register for GST separately in each state. Each entity that is part of a larger conglomerate must also register for GST separately. This is as per GST Law.
For example, Tata Starbucks and Indian Hotels Company Limited (who own and operate the ‘Taj’ chain of hotels) are both part of the larger conglomerate Tata Sons (for this example, we will ignore that Tata Starbucks is a subsidiary of Tata Consumer Products Limited). Under GST Law, both these companies will need to register for GST separately. IHCL supplies inputs to Tata Starbucks. In this case, both IHCL and Tata Starbucks will be known as ‘In such cases, where different legal entities (i.e. having different GSTINs) are controlled by the same entity (Tata Sons in this case), the controlled entities are known as ‘related persons’.
Below is the list of people/entities considered as ‘Related Person’ under GST:
According to the GST, “related parties” also refer to legal entities connected by the fact that one acts as the other’s sole agent, distributor, or concessionaire. Furthermore, in terms of GST, related parties can alternatively be referred to as associated people or separate people.
The value for the supply of goods or services should apply at 110% of the cost involved for the production, manufacturing, and acquisition of such goods or provision of such services if the goods or services or both are left unclassified in any of the rules prescribed in the procedure for determining the value of supply under GST.
Provisions have been made for supply of goods and/or services between related parties in order to safeguard such transactions when they are done in the normal course of business.
Goods and/or services are sometimes provided to related persons at a discount compared to the Open Market Value of those goods and services. In such a scenario, the company buying the goods or services can only claim Input Tax Credit to the extent of GST paid on the discounted invoice value, and not the GST that would have been paid if goods had been purchased at Open Market Value.