Valuation of Supply Between Principal and Agent
Under erstwhile VAT regime, the term ‘Dealer’ who was required to register on the basis of turnover of sales, included an agent who carries on the business of buying, selling, supplying or distributing goods on behalf of any principal. This was prevalent in most of the State VAT laws. This indicates, that the agent was treated at par with the trader who actually sold the goods. However, irrespective of his turnover, he was required to register, usually after effecting his first sale as an agent.
In GST, the agent is required to register mandatorily when he is engaged in the supply of goods on behalf of the principal and supply to the principal. The supply between the principal and agent will be a taxable supply and GST will be levied.
Generally, the supply of goods between the principal and agent are done without any consideration and for the activities the agent does on behalf of the principal, he gets a commission. Due to this, the above said supplies are considered as taxable even when it is made without consideration and are taxable under the following scenarios:
- Supply by the Principal to his Agent: When the agent undertakes to supply goods on behalf of the principal
- Supply by the Agent to the Principal: When the agent undertakes to receive such goods on behalf of the principal
Let us understand with an example.
Super Cars Ltd appoints Sharma Agency as an agent. Sharma Agency receives spare parts supplied by Super Cars Ltd, and as and when an order is received by Super Cars Ltd from his dealers, an instruction will be sent to Sharma Agency to supply the parts. Also, Sharma Agency is entrusted to receive raw material from the manufacturers on behalf of Super Cars Ltd.
As per the example,
- Super Cars Ltd is the principal and Sharma Agency is his agent.
- Supply of spare parts by Super Cars Ltd to Sharma Agency is a taxable supply.
- The receipt of raw material by Sharma Agency on behalf of Super Cars Ltd and the subsequent supply by Sharma Agency to Super Cars Ltd is a taxable supply.
Valuation of Supply Between Principal and Agent in GST
If you take a look at the above example, supplies made between Super Cars Ltd and Sharma Agency are without consideration and liable for GST Levy. But the question which remains to be answered is, ‘what is the value to be considered for the levy?’
To address this, the Valuation Rule has given the metrics in determining the value of supply between the principal and agent. The following are the metrics in deriving the taxable value:
|Open Market Value|
|Open market value of supply of goods or services is the full value in money, excluding the GST and cess payable by a person for a transaction.|
|90% of price charged for Supply of goods and/or services of like kind and quality by the recipient to his customer not being a related person.||This metrics is at the option of the supplier and only applicable if goods are intended for further supply by the recipient.|
Let us consider the example of Super Cars Ltd and Sharma Agencies
Super Cars Ltd supplies spare parts to his agent Sharma Agencies. On the day of supply, the agent Sharma Agencies is supplying spare parts of like kind and quality in subsequent supplies at a price of Rs.5,000 per no. Another independent supplier is supplying spare parts of like kind and quality to the said Sharma Agencies at the price of Rs.4,550 per No.
The value of the spare parts supplied by Super Cars Ltd will be the open market value i.e. Rs 4,550 or he can opt for 90% of the price charged by Sharma Agencies in his subsequent supplies i.e. 90% of Rs 5,000 which is Rs 4,500 per No.
If for any reason the above method cannot be applied for determining the value of supply, it will be determined by applying the cost of the product + 10 %, or by using the residual method. This will be explained in detail in our upcoming blogs.
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Author: Yarab AYarab is associated with Tally since 2012. In his 7+ years of experience, he has built his expertise in the field of Accounting, Inventory, Compliance and software product for the diverse industry segment. Being a member of ‘Centre of Excellence’ team, he has conducted several knowledge sharing sessions on GST and has written 200+ blogs and articles on GST, UAE VAT, Saudi VAT, Bahrain VAT, iTax in Kenya and Business efficiency.
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