A manufacturer in Tamil Nadu sends finished goods to its own depot in Karnataka. Nothing has been sold, but for GST the two registrations are separate persons, and the transfer is a taxable supply. The question is what value to put on it.
The valuation steps in Rule 28
Rule 28 of the Central Goods and Services Tax (CGST) Rules sets the steps for supplies between distinct or related persons:
- The open market value of the goods.
- If that is not available, the value of goods of like kind and quality.
- If that is not available either, a value based on cost (Rule 30) or by other reasonable means (Rule 31).
Two options sit alongside these. Where the goods will be sold on as they are, the supplier can choose 90% of the price the recipient charges an unrelated customer. And where the recipient can take full , the value declared on the invoice is treated as the open market value.
When the invoice value is accepted
For most branch transfers of finished goods, the receiving branch can take full credit, so the invoice value is accepted. The cost-based rule matters where it cannot: for example where the recipient makes exempt supplies, or where the item is one on which credit is blocked.
110% of cost: what counts as cost
Rule 30 values the supply at 110% of the cost of production or manufacture, or of acquisition. The rule does not define cost. Cost Accounting Standard 4 (), issued by the Institute of Cost Accountants of India (ICMAI), was written for this purpose and is the accepted way of working it out. In outline, cost of production takes in:
- Materials consumed, net of credits and recoveries
- Direct wages and salaries, and direct expenses
- Works overheads, quality control and research costs relating to production
- Administrative overheads that relate to production
- Adjustments for opening and closing work in progress, and credit for scrap and by-products
Selling and distribution costs, interest and abnormal costs are left out.
A short example
| Item | Per unit |
|---|---|
| Materials | ₹600 |
| Direct wages and expenses | ₹150 |
| Production overheads | ₹200 |
| Less: scrap recovered | (₹30) |
| Cost of production | ₹920 |
| Add 10% | ₹92 |
| Value for GST | ₹1,012 |
The certificate
The rule does not itself require a certificate. In practice the working is certified by a Cost Accountant in the format given in the standard, so that the value can be supported if the GST department asks. The certificate is for a period, and is revised when costs change materially.
Before relying on this article: valuation depends on the facts of each supply, including whether the recipient can take full credit. Check the current rules for your case.
