GST Valuation for Related Party Transactions

For most supplies, GST is charged on the price on the invoice. That stops being true when the supplier and the customer are related, or when they are two GSTINs of the same business. The law assumes such prices can be set for reasons other than the market, so it replaces the invoice price with a valuation sequence in Rule 28 of the CGST Rules. This post walks through who counts as related, which supplies are taxable even when nothing is charged, how Rule 28 values them, and the proviso that lets most fully taxable businesses keep using the invoice value anyway.

Why related-party supplies are valued differently

Section 15(1) of the CGST Act sets the default: the value of a supply is its transaction value, the price actually paid or payable. It attaches two conditions. The supplier and recipient must not be related, and the price must be the sole consideration for the supply.

When either condition fails, Section 15(4) sends you to the valuation rules. For related persons and distinct persons that means Rule 28. The concern is simple: a company selling to its own subsidiary could under-price the supply so that less tax is paid at a stage where the credit would not flow back in full. Rule 28 replaces the agreed price with a benchmark.

Note what this does not mean. Related-party transactions are not banned, and the invoice price is not presumed wrong. In practice, as the full-ITC proviso below shows, most fully taxable group transactions end up valued at the invoice price. The rules bite hardest where the recipient cannot claim the full credit.

Who counts as a related person

The Explanation to Section 15 deems persons to be related in any of these cases. "Person" here includes legal persons such as companies and firms.

• They are officers or directors of one another's businesses.
• They are legally recognised partners in business.
• They are employer and employee.
• Any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them.
• One of them directly or indirectly controls the other.
• Both of them are directly or indirectly controlled by a third person.
• Together they directly or indirectly control a third person.
• They are members of the same family.

The Explanation also treats persons associated in each other's business as related where one is the sole agent, sole distributor or sole concessionaire of the other.

Two consequences are easy to miss. A company and its directors are related, which is why director guarantees and director fees keep coming up in valuation disputes; the fee side is covered in GST on director remuneration. And employer and employee are related, which is why gifts and perquisites need a second look.

Distinct persons and supplies without consideration

Section 25(4) treats each GSTIN held by the same legal entity as a distinct person. A company with registrations in Maharashtra and Karnataka is, for GST, two persons dealing with each other. The mechanics of holding several registrations are in multiple GST registrations under the same PAN.

Schedule I, paragraph 2, then makes a supply of goods or services between related persons or distinct persons a supply when made in the course or furtherance of business, even if no consideration is charged. So a stock transfer from a factory to a branch in another state, or a head office running payroll and IT for all its branches, is a taxable supply by one GSTIN to another. The goods side of that, including the document trail, is in e-way bills for branch transfers.

Schedule I carries one relief: gifts by an employer to an employee not exceeding ₹50,000 in value in a financial year are not treated as a supply. Above that, the gift is a supply valued under Rule 28. Separately, input tax credit on goods given as gifts is blocked by Section 17(5); see blocked credits under Section 17(5).

Rule 28: the valuation sequence

Rule 28(1) values a supply between distinct or related persons, other than a supply made through an agent, using a strict sequence. You move to the next step only if the previous one cannot give you a value.

1. Open market value. The full value, in money, that would be paid for the same supply by an unrelated recipient at the same time, where price is the sole consideration.
2. Like kind and quality. If there is no open market value, the value of a supply of goods or services of like kind and quality.
3. Cost plus 10%, under Rule 30. If neither of the above is available, 110% of the cost of production, manufacture or acquisition of the goods, or the cost of provision of the services.
4. Residual method, under Rule 31. A value determined using reasonable means consistent with the principles of Section 15 and the rules. For services, the supplier may opt for Rule 31 instead of Rule 30.

Rule 28 also has an option for goods. Where the recipient will supply the goods onward as such, the supplier may choose to value them at 90% of the price the recipient charges its own customers who are not related to it. Rule 29, which covers supplies between a principal and an agent, has the same 90% option. It is useful for a manufacturer transferring stock to a sales depot in another state, because the depot's selling price is a figure you already have.

The full-ITC proviso: when the invoice value is accepted

The second proviso to Rule 28(1) is the most important line in the rule for multi-GSTIN businesses. Where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the open market value.

The logic is revenue-neutral. Whatever tax the supplying GSTIN pays, the receiving GSTIN takes back as credit, so there is no loss to the exchequer from an understated value. CBIC confirmed this for internal services in a 2023 clarification on cross-charge between distinct persons. As we read it, where the recipient branch is eligible for full credit, the value declared in the invoice is accepted, and where no invoice is issued for a particular service, its value may be treated as declared as nil and accepted as open market value. The same clarification said that including the salary cost of head office employees in the cross-charge value is not mandatory in that situation. Read the clarification itself on cbic-gst.gov.in before relying on it, because its conditions matter.

The proviso does not help when the recipient cannot claim full credit. Typical examples are a branch that makes exempt supplies, a bank or insurer reversing credit on a proportion basis, or a recipient whose credit is blocked under Section 17(5). There, you need a defensible open market value or a cost-based value. The general eligibility tests are in input tax credit rules explained.

Corporate guarantees under Rule 28(2)

Parent companies often guarantee a subsidiary's bank borrowing without charging for it. Because the two are related, that guarantee is a supply of services under Schedule I even without consideration, and for years the open market value of a free guarantee was contested.

Rule 28(2), inserted in October 2023, fixes it. The value of a corporate guarantee provided to a bank or financial institution on behalf of a related recipient is deemed to be 1% of the amount guaranteed, or the actual consideration, whichever is higher. CBIC has since clarified that the 1% applies per year for which the guarantee runs, and that a renewal is treated as a fresh supply. A later amendment added a proviso accepting the invoice value where the recipient is eligible for full input tax credit, which mirrors the relief in Rule 28(1).

The rule covers guarantees between related persons, typically companies in the same group. It does not cover a director's personal guarantee for the company's loans, which CBIC addressed separately. The clarifications and the proviso have details on timing, overseas group companies and when the tax is payable, so check the current text on cbic-gst.gov.in before you value a specific guarantee. For when the tax actually falls due on recurring or continuous supplies, see time of supply rules under GST.

Common scenarios and how each is valued

The table below maps the situations that come up most often to the valuation route. It assumes the supply is made in the course or furtherance of business.

One practical point before you rely on the full-credit proviso: check the other side. If a group company or a counterparty registration has been cancelled, or has stopped filing returns, its eligibility for credit is exactly what a department will question. You can confirm a GSTIN's status on the free GST number search (five lookups a day, no signup), or through the GST API, which returns registration details and GSTR filing history in one call at ₹0.50 per verification.

Frequently asked questions