Library / Goods and Services Tax: The Professional's Master Guide

11. Value of Supply (Section 15 and Rules 27 to 35)

Tax is a percentage of value, so every error in value becomes an error in tax. Section 15 of the CGST Act (applied to IGST by section 20 of the IGST Act) starts with the price the parties actually agreed, adds items that parties tend to keep outside the price, allows certain discounts, and sends the supplier to the valuation rules (rules 27 to 35 of the CGST Rules) where the price cannot be relied on.

11.1 Transaction value and inclusions

Under section 15(1), value is the transaction value: the price actually paid or payable, where the supplier and recipient are not related and the price is the sole consideration. If the parties are related, or the supplier gets something besides the price, the rules take over (section 15(4)). "Related persons" is defined widely in the Explanation to section 15: directors and officers of each other's businesses, partners, employer and employee, persons holding 25% or more of the voting shares of both, persons controlled by a third person, and family members. Branches in different States are distinct persons, covered by rule 28.

Section 15(2) adds five items to the price:

Clause (b) applies only if the supplier was liable for the amount. Clause (e) keeps Government subsidies out so that tax does not eat into them; a subsidy from a private source that is linked to the price is added.

11.2 Discounts (Section 15(3))

A discount given before or at the time of supply is excluded if it is duly recorded in the invoice (section 15(3)(a)). A discount given after the supply is excluded under section 15(3)(b) only if: (i) it is established in terms of an agreement entered into at or before the supply and specifically linked to the relevant invoices; and (ii) the recipient has reversed the ITC attributable to it. The supplier then issues a GST credit note under section 34. After the Finance Act, 2025 amendment to section 34(2), the supplier can reduce output tax only if the recipient has reversed the credit, which the recipient now declares on the Invoice Management System. CBIC Circular 212/6/2024-GST (June 2024) explained how the supplier can evidence that reversal: a certificate from a chartered accountant or cost accountant for larger amounts, and an undertaking from the recipient otherwise.

A discount that does not meet these conditions, such as a scheme announced after the sale, is given through a "financial" credit note without GST, and the supplier's tax is not reduced. CBIC Circular 251/08/2025-GST dated 12 September 2025 clarified that the recipient then need not reverse ITC; that a post-sale discount from a manufacturer to a dealer is ordinarily a price reduction and not payment for a promotional service, unless the dealer undertakes specific promotional work under a contract for identified consideration; and that where the manufacturer agrees a lower price with the end customer and compensates the dealer, the compensation is third-party consideration added to the dealer's value.

11.3 Non-monetary consideration and related persons (Rules 27 and 28)

Where consideration is not wholly in money, rule 27 applies in order: (a) open market value; (b) money consideration plus the money value of the non-monetary part, if known at the time of supply; (c) value of a supply of like kind and quality; (d) rule 30 or 31.

Rule 28 applies to supplies between related persons and between distinct persons (other than through an agent). Value is (a) open market value, (b) value of like kind and quality, or (c) rule 30 or 31. The first proviso allows the supplier, where the recipient resells the goods as such, to take 90% of the price the recipient charges an unrelated customer. The second proviso deems the invoice value to be open market value where the recipient is eligible for full ITC, since any tax paid comes back as credit. Disputes therefore arise only where the recipient cannot take full credit: a branch with exempt supplies, a hospital, a bank using the 50% option under section 17(4), or a unit whose outputs are taxed at 5% without ITC.

Corporate guarantees (Rule 28(2))

Rule 28(2), inserted from 26 October 2023 and amended by Notification 12/2024-Central Tax with effect from that date, values a guarantee given to a related person in India (or to a bank on its behalf) at 1% of the guaranteed amount per annum, or the actual consideration, whichever is higher. Where the recipient is eligible for full ITC, the value declared in the invoice is accepted. The rule does not apply to guarantees for recipients outside India.

Circular 204/16/2023-GST clarified that a director's personal guarantee to a bank without consideration is valued at nil, since the director's remuneration covers it, while a holding company's guarantee for a subsidiary is taxable. Circular 225/19/2024-GST added that the 1% applies for each year (proportionately for part of a year); tax is payable on the full guaranteed amount even before the loan is fully drawn; each co-guarantor pays on its share; every renewal is a fresh supply; and guarantees given before 26 October 2023 were also taxable but valued under the earlier rules.

11.4 Agents, cost and residual method (Rules 29 to 31)

Rule 29 values supplies between principal and agent at open market value or, at the supplier's option, 90% of the agent's price to unrelated customers for goods of like kind and quality. Rule 30 takes 110% of the cost of production, acquisition or provision (a die costing Rs. 1,00,000 to make is valued at Rs. 1,10,000). Rule 31 is residual: reasonable means consistent with section 15. For services, the supplier may skip rule 30 and go straight to rule 31.

Rules 31A to 31C deal with activities now taxed at 40%. For lottery, value is 100/140 of the face value or the price notified by the organising State, whichever is higher (changed from 100/128 with effect from 22 September 2025). For betting, gambling and horse racing, value is the full face value of the bet or the amount paid into the totalisator. Rule 31B values online gaming on the amounts deposited by players (excluding amounts played from winnings); online money games are now prohibited by the Promotion and Regulation of Online Gaming Act, 2025. Rule 31C values casino supplies on the amount paid for tokens, chips, coins or tickets.

11.5 Specific supplies under Rule 32

Individual life and health insurance policies are exempt from 22 September 2025, so rule 32(4) now matters mainly for group and other non-individual policies.

11.6 Pure agent (Rule 33)

Rule 33 excludes amounts paid to third parties on behalf of the client only if the supplier acts as a pure agent: he pays the third party on the recipient's authorisation, shows the payment separately in the invoice, and the goods or services so procured are in addition to his own services. The Explanation adds that the pure agent must have a contract with the recipient to incur the expenditure, must not hold or intend to hold title to what is procured, must not use it for his own interest, and must recover only the actual amount.

11.7 Exchange rate and tax-inclusive value (Rules 34 and 35)

Under rule 34, the exchange rate for goods is the rate notified by CBIC under section 14 of the Customs Act, 1962, and for services the rate determined under generally accepted accounting principles, in each case for the date of time of supply. Under rule 35, where value includes tax, tax = (tax-inclusive value x rate) / (100 + rate); on Rs. 1,180 at 18%, tax is Rs. 180.

11.8 Free supplies by the recipient

Customers often supply cement and steel to contractors, moulds to component makers or packing material to job workers free of cost. Under section 15(2)(b), such material is added to value only if the supplier was liable to pay for it. CBIC Circular 47/21/2018-GST dated 8 June 2018 applied this to moulds and dies supplied free by an OEM to a component maker: not added unless the contract makes the component maker bear their cost, and the OEM need not reverse ITC on them.

11.9 Cross charge, employees and secondment

A head office providing internal services to branches in other States makes a supply to distinct persons (Schedule I, para 2). Circular 199/11/2023-GST dated 17 July 2023 clarified that where the recipient branch is eligible for full ITC, the invoice value is deemed open market value, and where no invoice is raised, the value may be treated as nil; salary cost of head office staff need not be included. If the branch is not fully taxable (say, a hospital branch), value is open market value or, failing that, 110% of cost under rule 30: for internal IT support costing Rs. 25,00,000, value would be Rs. 27,50,000 and IGST Rs. 4,95,000. From 1 April 2025, common input services bought from third parties must be distributed through ISD registration.

Perquisites given to employees under the contract of employment are not supplies (Circular 172/04/2022-GST), though ITC on canteen and similar facilities is blocked by section 17(5)(b) unless the employer is legally required to provide them. Gifts up to Rs. 50,000 per employee in a financial year are not supplies (proviso to Schedule I, para 2). Above that limit, in the commonly accepted view, the whole value is taxed at open market value.

Circular 210/4/2024-GST dated 26 June 2024 settled valuation: where the Indian recipient is eligible for full ITC, the invoice value of services from a related foreign entity is deemed open market value, and where no invoice is issued the value may be treated as nil.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.