I’m Simran Bhatt, and I’m hoping someone can offer some guidance on a rather specific GST challenge I’m currently facing. I cleared my CA Final exams in May 2023 and I’m now working as a tax consultant, primarily focused on GST.
During my articleship, I gained experience in filing GSTR-3B and GSTR-1, but I’m now grappling with a more complex scenario involving deemed supply under Schedule I of the CGST Act. Specifically, my client is a holding company providing various services like marketing and HR to its wholly-owned subsidiary without any direct monetary consideration. While the intention is not to evade tax, establishing the open market value of these services seems incredibly subjective, and I’m worried about potential scrutiny from the GST authorities down the line.
I’ve reviewed the relevant valuation rules under Rule 28 of the CGST Rules, but applying them in practice is proving difficult. Has anyone dealt with similar situations, and if so, what practical approaches did you take to determine a justifiable valuation for deemed supply in such inter-company transactions? Any insights on documentation needed to support the valuation and potentially mitigate future disputes would be extremely helpful.
Hi Simran,
Kavya here. I understand your concern regarding deemed supply valuation under Schedule I. It’s a tricky area, especially with inter-company transactions lacking direct monetary consideration.
Rule 28 is indeed your starting point, but practical application can be challenging. Here’s what I’ve found useful:
First, meticulously document the services provided. Create service level agreements (SLAs) even if they are internal. Outline the scope, quantity, and quality of services rendered. This acts as a basis for valuation.
Second, explore cost-plus markup method. Calculate the actual cost to the holding company for providing these services (salary costs of HR team, marketing expenses, etc.) and add a reasonable markup. Justification for the markup is crucial – industry standards or comparable market data are helpful here. ICAI’s guidance notes on GST valuation might offer examples.
Third, consider using a valuation report from a registered valuer, as permitted under Rule 28(c). While it’s an added expense, it provides strong support in case of scrutiny.
Remember, documentation is key! Retain all supporting documents used in determining the value, including cost sheets, market research, and valuation reports. Section 15 of the CGST Act emphasizes the importance of transaction value, but when that’s unavailable, a justifiable and well-documented valuation is your best defence. I’ve faced similar situations and proactive documentation has always helped minimize potential disputes. Good luck!