Exchange offers may pinch the pockets of an individual buyer, going by the draft rules for valuation of supply under GST. This tax is triggered on supply of goods or services. Supply is a comprehensive term that includes not just sale, but also exchange and barter. The draft valuation rules, released on April 1, explicitly provide that in cases where the supply of goods is ‘not wholly in money’, the value of the supply will be its open market value. The draft rules provide an illustration: A new phone is supplied for Rs 20,000 in case it’s exchanged with an old phone.
Without the exchange, the price of the new phone is Rs 24,000. In this case, the open market value of the supply will be Rs 24,000. GST will be computed on this amount, rather than on Rs 20,000.
Exchange offers are quite popular in the white goods segment — old mobile phones, refrigerators, television sets, cars, et al — can be exchanged under various schemes extended by both brick-and-mortar and online stores.
“Currently, in most states (Gujarat being a notable exception), VAT is payable on the money consideration paid by a customer. Under the proposed draft rules, the supply value will be the market value of the goods itself,” explains Badri Narayanan, partner at law firm Lakshmikumaran & Sridharan. “The differential levy, which arises owing to non-adjustment of the value of the old product, will pinch the pocket of an individual customer (say a salaried employee) who cannot claim any input tax credit for the GST borne by him.”
The draft valuation rules state that where goods or services are supplied and where the consideration is not wholly in monetary terms, the valuation for GST levy will be determined in the following order — open market value (according to the earlier illustration); value of goods and services of like kind and quality; 110% of the cost and, lastly, any other reasonable means. “There will be added complexity in cases involving exchange of old goods. As there is a supply of an old phone by the customer (who is not registered under GST), the mobile phone dealer will have to bear GST on this old phone under a reverse charge mechanism,” adds Bipin Sapra, indirect tax partner at EY – India.
The valuation draft rules also provide that the value of supply of services by an agent for booking of air travel tickets shall be 5% of the basic fare in case of domestic and 10% in case of international travel. This remains the same as current rates, even as the industry had recommended that a lower rate be introduced under GST.
“However, if the GST on air travel is higher than the current rate of 15%, say 18%, it would also have a cascading impact on booking costs. In such an eventuality, the customer would pay more for air travel,” points out Narayanan.
For supply of services relating to life insurance, the current practice of reducing the investment-related component to arrive at the taxable value of the service continues. “GST is a consumption tax and investment is not a consumption,” explains Narayanan.