GST Valuation Challenges for Related Party Transactions

The Goods and Services Tax (GST) framework in India is built on principles of uniformity, transparency, and fair valuation of transactions. However, when it comes to related party transactions under GST, valuation becomes a complex issue. Such transactions, by nature, may not always be conducted at arm’s length, making it difficult for tax authorities to determine the accurate taxable value. This blog delves into the key valuation challenges, legal provisions, and compliance requirements surrounding related party transactions under GST.

Who Are Related Parties Under GST?

Before diving into valuation, it is important to understand what constitutes related party transactions under GST. According to Section 15 of the CGST Act, 2017, persons shall be deemed to be “related” if:

• They are officers or directors of one another’s businesses,

• They are legally recognized partners,

• They are employer and employee,

• One person directly or indirectly owns or controls the other,

• They are members of the same family,

• They are subsidiaries or holding companies of the same group.

These relationships often lead to transactions where the pricing is influenced by non-commercial considerations, which is why related party transactions under GST are subject to special valuation rules.

Legal Framework for Valuation

The general rule under GST is that the value of supply is the transaction value, i.e., the price actually paid or payable for the supply when the supplier and the recipient are not related and price is the sole consideration. However, in the case of related party transactions under GST, the transaction value cannot be accepted outright.

As per Rule 28 of the CGST Rules, if the supply is between related persons (other than through an agent), the value shall be:

1. The Open Market Value of such supply;

2. If not available, the value of supply of like kind and quality;

3. If both are not available, then based on cost plus 10% method;

4. Where the recipient is eligible for full input tax credit (ITC), the invoice value is deemed to be the open market value.

This rule attempts to safeguard revenue while allowing flexibility where ITC ensures tax neutrality.

Valuation Challenges in Practice

Despite a well-laid legal framework, there are several practical challenges in valuing related party transactions under GST. Let’s explore them below:

1. Absence of Open Market Value

In many industries, especially in captive consumption or in-house transfers (e.g., software development, shared services), there may be no comparable open market value. This forces businesses to adopt cost-based methods, which may vary due to inconsistent cost allocation.

2. Subjectivity in Cost Allocation

Determining the cost of a product or service can be subjective. Different companies use different bases for allocation—activity-based costing, standard costing, etc. This leads to varying interpretations of “cost plus 10%,” causing disputes in related party transactions under GST.

3. Impact on Working Capital

Overvaluation due to conservative interpretations can increase GST liability, which in turn may block working capital—especially for companies engaged in B2B transactions where credit is available but refunds take time.

4. Documentation and Justification

One of the biggest headaches in related party transactions under GST is the requirement of detailed documentation. Tax officers may ask for proof of cost structures, price computation, or justification for selected valuation methods. Many companies fail to maintain adequate documentation, increasing compliance risks.

5. Transfer Pricing Conflicts

GST valuation rules are different from Income Tax transfer pricing rules. For multinational corporations, aligning related party transactions under GST with transfer pricing documentation becomes a significant challenge and may lead to inconsistencies between tax departments.

6. Multiple Jurisdictions

When related party transactions under GST occur across states, the problem multiplies. Valuation may be accepted in one state but disputed in another, leading to litigation and inconsistent tax treatment.

Case Example: Inter-Company Support Services

Suppose a parent company provides IT and HR support to its subsidiary without charging any consideration. Under GST, this is a supply between related parties, even if free. Since it’s without consideration, Schedule I of the CGST Act mandates valuation.

Now, the company must determine value using the cost method or open market benchmarks. The tax is payable even if no money is exchanged, increasing compliance complexity in related party transactions under GST.

How to Overcome the Valuation Challenges

To ensure compliance and avoid disputes, businesses must adopt robust internal processes for handling related party transactions under GST:

1. Standardize Costing Methodology

Adopt a consistent, auditable costing method across departments and entities. Ensure that documentation for cost break-ups is updated regularly.

2. Maintain Detailed Documentation

Keep records of contracts, inter-company agreements, cost sheets, and valuation rationale. This can help defend your valuation method during audits.

3. Use Expert Benchmarks

Where possible, use industry benchmarks, third-party valuations, or independent chartered accountant reports to justify pricing.

4. Leverage Input Tax Credit Provision

If the recipient is eligible for full ITC, use the proviso to Rule 28 to value the supply at invoice value. This simplifies compliance and avoids unnecessary disputes in related party transactions under GST.

5. Periodic Review of Valuation Policies

Business models evolve—what worked last year may not work today. Regularly review your GST valuation policies to ensure they align with current practices and legal requirements.

Conclusion

Navigating related party transactions under GST is no easy feat. While the rules are clear, their practical implementation requires careful attention to valuation, documentation, and audit readiness. The key is to strike a balance between regulatory compliance and operational practicality. With proactive measures, businesses can minimize disputes and maintain GST compliance even in complex intra-group scenarios.

Whether you are a multinational enterprise or a domestic business group, understanding the nuances of related party transactions under GST is vital for staying on the right side of the law and ensuring tax efficiency.