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Many businesses have multiple branches across states. Under the new GST law, they are required to register separately in each state they are operable in. Also, there can be multiple entities within a conglomerate which would also require multiple registrations under GST.
For instance, TATA Steel and TATA Motors are both considered separate legal entities under TATA Sons, even though the former supplies inputs to the latter. Such business entities which may have separate legal existence while sharing a common control, fall under the definition of ‘related person’ under GST law.
The above provisions have been included to safeguard the transactions done during the normal course of business between related persons, in good faith.
Taking our aforementioned example of related person under GST Law, let’s say that TATA Steel supplies goods worth Rs. 1,50,000 (which is the OMV of the goods) to TATA Motors for Rs. 1,00,000; and TATA Motors claims the full amount of GST charged in the invoice which is Rs. 18,000 (@18% of Rs. 1,00,000) as input tax credit, then this invoice value will hold true for valuation purpose. Eventually, when TATA Motors sell their products to their end consumers they will only get input credit of what was paid earlier as tax i.e. Rs. 18,000 (and not the tax that should have been paid if the goods were sold at OMV).