One of the key business processes in any taxation system is "assessment". In fact, assessment is nothing but the determination of duty and is the outcome of the fusing of three elements: One, classification: Applying the appropriate rate of duty. Two, valuation: Applying the rate on the appropriate value. Three, Cenvat credit: Availing of the appropriate input duty credit.
With the establishment of a standard rate of duty covering most commodities and services, and the phasing away of many exemptions in the GST, classification matters would cease to be contentious. It is "valuation", however, that remains a potential source of dispute.
The Constitutional Amendment Bill that has just been passed would allow the Centre to tax "trading" and the states to tax "services". At one stroke, this measure will integrate the entire value chain for the purpose of taxation and put in place the dual value added tax (VAT) mechanism. Both the Centre and the states will concurrently tax the same taxable base, from raw material to retail. Presently, the value chain is fractured for the purpose of taxation, with the Centre taxing the manufacturing portion and the states taxing the remaining trading portion. The current system of valuation based on the transaction value is actually a response to the problem created by the fractured tax system.
The concept of transaction value has its roots in Central excise taxation, where the taxable event is "manufacture" and the Centre's taxation powers are confined to collecting the tax up to the manufacturing stage. Unfortunately, the drafting committee has imported the transaction value concept, which is a throwback to the Central excise tax, and applied it to the VAT scenario - which covers both goods and services, and extends right across the value chain. This transaction value concept creates problems in valuation, especially for self-supplies and transfer of services (such as leasing of equipment). Continuation of this provision in the GST Model Law poses the danger of opening a Pandora's box of disputes. Unlearning of legacy concepts may sometimes be necessary for drafting a new law.
The valuation provisions are contained in Rule 3 of the GST Valuation (Determination of the Value of Supply of Goods and Services) Rules, 2016, which relates to the method of determination of value. Rule 3(1) states inter alia that "the value of goods and/or services shall be the transaction value". This provision provides the legal basis for adopting the transaction value methodology.
The solution lies in moving away from the concept of transaction value to the concept of an invoice value that reflects the amount of tax paid or payable. This is a concept that has been followed by countries such as Canada and Australia, which have implemented a value added tax. These countries, like India, have a federal structure and are therefore comparable.
Trade and industry could face difficulties in complying with transaction value provisions, especially in the area of self-supplies. For example, there could be inter-branch transfers of goods of a company located in different states. The present law requires that if both the branches are registered entities, supplies of goods and services would have to be valued on the basis of transaction value. It is difficult to identify the transaction value in such cases, as merely a transfer is involved. Therefore, acceptance of a declared invoice value would be a feasible solution, and legal backing may be provided through a deeming provision.
In the area of services, the problem may be compounded by situations where outsourcing takes place. For example, an architect may outsource work to many other professionals such as a building contractor, a design engineer, or a landscape expert. Arriving at a transaction value in such cases may lead to disputes. Similarly, in the case of leasing services, especially of equipment, the transaction value may unduly burden the provider of leasing services by including the capital cost. Here, the cost of the services alone should form the taxable value.
Some provisions in the law for guiding related party transactions may have to be provided. Codification of illustrative cases of related party transactions in the law may be useful in avoiding disputes. Further, there may be a need for prescribing some conditions when a declared value could be rejected, and this would largely apply in the case of business-to-consumption (B2C) transactions. Some special provisions for valuation of services could also be retained in the Model GST Law. Transaction value concepts such as supply by comparison, computed value method and residual method could be done away with.
The result of these suggested changes could be that, by and large, the taxation authority would accept the self-declared and self-assessed invoice value representing the amount paid or payable. Valuation disagreements would therefore be confined to a narrow area covering related party transactions and some B2C transactions. The simple valuation provisions outlined above could be incorporated in the Model GST Law as a separate chapter, and hence it may not be necessary to have separate "valuation rules". This would also help establish a nexus with other provisions of the law relating to "assessment" and "supply".
To sum up, a paradigm shift in the concept of value from "transaction value" to "self-declared invoice value" would help redress the most retrograde feature of the GST Model Law, which otherwise has many redeeming features.
The writer is a retired Member, Central Board of Excise and Customs, and Tax Policy Advisor, EY India
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
