Clarification on valuation of supply of import of services by a related person where recipient is eligible to full input tax credit

27Jun 2024 by admin

Circular No.: 210/4/2024-GST
Date: 26th June, 2024
Subject: Clarification on valuation of supply of import of services by a related person where recipient is eligible to full input tax credit

Key Points and Clarifications:

Background:

This circular addresses issues related to the valuation of imported services provided by a related person to a domestic entity, particularly when the domestic recipient is eligible for full input tax credit (ITC). It aims to ensure uniformity in implementing the provisions of the Central Goods and Services Tax (CGST) Act, 2017.

Key Provisions and Rules Involved:

  • Section 25(4) and (5) of the CGST Act, 2017: Defines distinct persons and related persons.
  • Rule 28 of the CGST Rules, 2017: Specifies the value of supply of goods or services between distinct or related persons.
  • Section 168(1) of the CGST Act, 2017: Empowers the Board to issue instructions and directions to GST officers to ensure uniformity in the implementation of the Act.

Rule 28 Details:

  • Open Market Value: The value of supply is the open market value.
  • Value of Supply of Like Kind and Quality: If the open market value is not available, the value of supply of goods or services of like kind and quality is used.
  • Determined Value: If neither of the above is available, the value is determined by applying Rule 30 or Rule 31 of the CGST Rules.

Second Proviso to Rule 28:

  • When the recipient is eligible for full ITC, the value declared in the invoice is deemed to be the open market value of the goods or services.

Issues and Clarifications:

Issue 1: Taxability and Valuation of Services Provided by Foreign Related Persons to Domestic Entities with Full ITC

  • Concern: Some field formations raised demands against registered persons in India for services provided by their related foreign persons, based on an expansive interpretation of the deeming fiction in Schedule I, though no consideration is involved.
  • Clarification: The value declared in the invoice by the related foreign entity is deemed the open market value if the recipient in India is eligible for full ITC. If no invoice is issued, the value is deemed Nil.

Issue 2: Self-Invoicing and Reverse Charge Mechanism (RCM) for Services from Foreign Related Persons

  • Concern: The procedure for self-invoicing and paying tax under RCM for services received from related foreign persons.
  • Clarification:
    • The recipient in India must issue a self-invoice under Section 31(3)(f) of the CGST Act and pay tax on an RCM basis.
    • If the invoice is not issued by the foreign related person, the value of services is deemed Nil.

Key Points from Circular:

  1. Application of Rule 28:
    • The second proviso to Rule 28(1) applies to supplies between distinct persons and related persons, where full ITC is available to the recipient.
    • The invoice value is deemed the open market value in such cases.
  2. Import of Services:
    • For imported services from a related person located outside India, the registered person in India must pay tax on an RCM basis.
    • The value declared in the self-invoice is deemed the open market value if full ITC is available to the recipient.
    • If no invoice is issued by the foreign related person, the value is deemed Nil.
  3. Tax Payment and ITC:
    • The registered person in India must issue a self-invoice and pay the tax on an RCM basis for services received from a foreign related person.
    • The registered person can claim full ITC on the tax paid.
  4. Uniformity in Implementation:
    • The circular aims to ensure uniformity in implementing these provisions across all field formations.

Tabular Summary

IssueClarification
Taxability and Valuation of Services Provided by Foreign Related Persons to Domestic Entities with Full ITCValue declared in the invoice is deemed as the open market value if full ITC is available; if no invoice, value is deemed Nil.
Self-Invoicing and Reverse Charge Mechanism for Services from Foreign Related PersonsThe recipient in India must issue a self-invoice and pay tax on an RCM basis. If no invoice is issued by the foreign related person, the value is deem