Valuation of Supply Rule Under GST – Cost Method

In our previous articles, we discussed the valuation rules of supply between related entities, principal-agent etc. Continuing our discussion further, here we are providing the analysis of Cost Method of Valuation of supply under Goods and Services Tax Law. Cost method has also been referred in each valuation rule where there is no direct method for valuation possible.

Cost method says “where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacturing or cost of acquisition of such goods or cost of provision of such services”

In simple terms,  110% of the cost of manufacturing or cost of provision of goods or services shall be considered for the purpose of the valuation and accordingly Goods and Services Tax will be charged on such amount.  

Let’s understand with the help of one example:

Suppose Nilkamal Limited is manufacturing office chairs and the cost of manufacturing is Rs. 4,000 per chair. Similar chair in open market is valued at Rs. 4,500. These chairs are supplied to a furniture showroom at the rate Rs. 3,000 and balance in non-monetary consideration. Now since the open market value is available, Rs. 4,500 will be considered for valuation of supply.

However in case if Open Market Value is not available, the value of supply as per cost method will be followed which says it has to be 110% of the cost of manufacturing i.e. Rs. 4,000*110% = Rs. 4,400. Thus GST will be charged on Rs. 4,400 in this case.