In GST, the value of supply is the base on which tax is calculated. Generally, the invoice shows the value of goods or services exclusive of GST, and tax is added separately. However, in some cases, the price agreed upon between the supplier and the recipient may already be inclusive of GST.
For example:
A shopkeeper sells an item for ₹1,000 inclusive of all taxes. Now, the challenge is to determine how much of this ₹1,000 is the actual taxable value and how much is the GST portion.
Formula for Tax Amount (Inclusive Value Case)
When the price of supply is inclusive of GST, the tax amount is calculated as:
Tax amount = (Value inclusive of taxes × Tax rate %) ÷ (100 + Sum of applicable tax rates %)
Where:
- Value inclusive of taxes = Total invoice value agreed (including GST).
- Tax rate % = Rate of IGST, or CGST + SGST, or UTGST as applicable.
- 100 + sum of tax rates = Denominator ensures we are removing the GST portion from the gross value.
Example
Mr. A sells goods to Mr. B at ₹1,000 inclusive of IGST (18%).
Using formula:
Tax amount = (1,000 × 18) ÷ (100 + 18)
= 18,000 ÷ 118
= ₹152.54 (IGST)
👉 Taxable Value (before tax) = 1,000 – 152.54 = ₹847.46
(a) Open Market Value (OMV)
- Defined as the full value in money, excluding GST and cess, at which goods or services are ordinarily sold in the open market when:
- Supplier and recipient are not related, and
- Price is the sole consideration.
Example:
A branded shirt is sold in the open market at ₹2,000 (exclusive of GST). This price, when applied to other transactions of the same shirt, will be considered its open market value.
(b) Supply of Goods or Services or Both of Like Kind and Quality
Where a transaction lacks a clear open market value reference, goods or services of like kind and quality are considered for valuation. These are supplies made under similar circumstances sharing comparable features such as:
- Characteristics
- Quality and quantity
- Functional components
- Materials used
- Reputation of the product or service
This comparison ensures consistent and appropriate valuation for taxation by finding a close or substantially similar supply as a benchmark.
Example:
If a luxury sofa set from Brand A is being valued, but no direct open market value is available, the price of a similar quality sofa set from Brand B with nearly the same features and reputation can be considered.
Accurate Valuation and Tax Calculation
- Accurate separation of tax and supply value helps businesses comply with invoicing and input tax credit rules.
- The transparent tax breakdown clarifies the buyer’s and seller’s obligations.
- It avoids disputes in tax assessments and audits by using standard definitions for valuation.
- Helps in consistent tax reporting in both inter and intra-state transactions.
Final Note
In summary, whenever the price is inclusive of GST, the formula ensures accurate extraction of the tax portion and taxable value. And in cases where direct transaction value cannot be fairly determined, GST law falls back on open market value or supplies of like kind and quality to ensure transparency, fairness, and compliance in taxation.
