As per the Determination of Value Supply, Open Market Value has to be considered for some transactions and OMV is “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.
As per the draft Determination of the Value of Supply, if the open market value is not known or the total amount of consideration in money or kind is also not known at the time of supply, valuation can be determined for the value of supply of goods or services or both on supply of similar goods or services for similar quality.
As per the draft Determination of Value of Supply, for a supply if the open market value is not available then the consideration received in cash or in kind or sum of both is to be considered for the transaction value and taxes are applicable on the transaction value.
As per the draft Determination of Value of Supply Rules, where the supply of goods or services is for consideration not wholly money, the value of supply shall be the open market value.
The rollout of Goods and Service is being dubbed to be the mother of all indirect tax reforms in the country but in reality, it is a business process reform. It changes the way we do business in India after the rollout of GST. There is no room for the words purchase or sale of goods in the GST Laws, it replaces these words with Supply. The word supply includes all activities which are undertaken for consideration or in lieu of consideration i.e barter. This nails down all the disputes which are there in the current taxation.
Similar to this we also have another concept called the taxation of employee benefits, though employee benefits are taxed under the current taxation under Income Tax Act 1961, it is being proposed to tax the same under Goods and Service Tax also in India. The taxation of employee benefits has been taken from Malaysia, where GST is implemented from 1st of April 2015.
To understand the tax implication of employee benefits let’s see the definition of Supply and Related Parties.
Supply is defined clearly in section 3 and Schedule I & II states what activities are to be treated as supply as per the Central Goods and Service Tax Bill introduced in the Parliament
Section – 3
- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
- import of services for a consideration whether or not in the course or furtherance of business;
- the activities specified in Schedule I, made or agreed to be made without a consideration; and
- the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
- Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
- Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
- Supply of goods—
- by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
- by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
- Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
In paragraph 2 we find the wordings “Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as the supply of goods or services or both”.
The basis of the above, here we do not have any consideration received but still, GST has to be paid.
Gifts are not normally given to employees for their exceptional performance or during the festivals and these are not part of the offer letter or the appointment letter. Now under GST, ll such gifts either in kind or in cash or in form of services provided by the company will be taxed and it means that the company has to pay GST on such transactions. When gifts are issued there is no consideration received from the employee, as discussed it is token of appreciation or for their loyalty.
Now companies or establishments have to pay GST similar to the reimbursement costs collected from the employees like issue of duplicate ID card etc.,
Though the schedule talks about the threshold limit of Rs 50,000 one thing which is not clear is “is GST applicable one the gifts from the one rupee or only on the amount which crosses Rs 50,000. As of now, the law is not clear on this point, we need to wait for the final rules and law.
Another question is how to pay the GST, does the company has to issue a tax invoice? If yes will the buyer and seller will be the same? Under which section of the GSTR – 1 return this tax invoice has to be shown? Clarity is also required in this context also.
Value of gifts issues in a financial year means total values of gifts issued during the financial year from time to time, this means that there should be a provision in the accounting or any other software the taxpayer is using to keep track of the same in the system by employee and that should be able to generate a tax invoice once it crosses Rs 50,000 for an employee.
The next question, can the registered taxable person claim input tax on the gifts procured to be distributed to the employees? Input tax credit is eligible only if used for the furtherance of business or used for the outward supply of goods or services, this is clear from the section 16 and 17 of the CGST Act. Say for example A Ltd wants to give Diwali gift to all its employees Halidram sweet boxes costing Rs 3000 each. A Ltd incurs Rs 1,75,000 for bringing the sweet boxes to it is office as transportation costs, is GST paid on the inward transport cost is eligible to be taken as input tax credit?
Section 16 as input tax credit is eligible only if it used for the furtherance of business but in the case of gifts, it will directly impact the furtherance of business. Say if A Ltd does not give Diwali gifts to its employees their morale will come down and resulting in it lower performance and thereby impacting the furtherance of business. The basis of this logic can A Ltd take input tax credit on GST paid on the transportation charges?
Clarity is required in this context also else it can lead to disputes between the trade and industry.
It is normal practice to provide tea or coffee or any other beverage to the employees, though it is not part of the appointment or offer letter, does the cost of coffee or tea cost should be included gifts value? This is not recommended by the government so technically it has to treated as a gift if we go by the clause A of subsection 5 of Section 17 of the CGST Act.
- the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
Or we have to wait for the list to be notified by the government, if yes then it should spell out that providing of coffee or tea is not to be treated as gift.
In the meantime, the companies have to relook their practice of giving gifts to employees and also have proper systems in place to pay taxes if any such a need arises. For this, the systems being implemented in place should track the gifts by the employee. The offer letter/appointment letters issued should be revisited and if required the clauses need to be modified in line with the GST requirements. The early they do this activity the better for the organizations.
Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
These examples are based on the information available in the public domain and authors interpretation of the law and may change based on the actual law passed.
In Annexe 2 of GSTR – 9B, the taxpayer has to furnish a reconciliation statement for the inward supplies made in a particular state to the financial statements with the following details, supplies for which consideration is paid, and under barter, supplies to related parties, transactions carried out as a pure agent or money exchanger and other supplier notified by the State and the Central Government from time to time, all these details should be provided in Section A.