Related-party transactions face special GST scrutiny because they may not be at arm's length. GST law not only taxes many related-party supplies without consideration but also requires valuation at open market value. Group companies, family businesses and employer-employee arrangements need careful compliance.
Who Are Related Persons?
The explanation to Section 15 of the CGST Act defines related persons to include:
- Persons who are officers or directors of each other's businesses.
- Persons who are legally recognised partners in business.
- Persons who are employer and employee.
- Any person who directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both.
- One of them directly or indirectly controls the other.
- Both are directly or indirectly controlled by a third person.
- Persons who together directly or indirectly control a third person.
- Members of the same family.
- Sole agent, sole distributor or sole concessionaire, whether described as such, as may be notified.
This is a wide definition. It includes parent-subsidiary, brother-sister companies under common control, directors and their companies, and even close family members where the transaction is in the course or furtherance of business.
When Is Consideration Presumed?
Under Schedule I, supplies between related persons are treated as supply even without consideration, if made in the course or furtherance of business.
Examples:
- A parent company provides management services to its Indian subsidiary without charge.
- A holding company gives an interest-free loan or corporate guarantee to a group company.
- A director provides services to the company without remuneration, if in the course of business.
- A partnership firm transfers goods to a partner's business without consideration.
- A group company allows another group company to use its trademark or software without charge.
These transactions are taxable because of the related-person relationship even though no invoice or payment exists.
Import of Services from Related Person
Under Schedule I, import of services by a taxable person from a related person outside India, or from any of the taxable person's establishments outside India, is taxable even without consideration.
This means an Indian subsidiary receiving free head office support from its foreign parent may have a reverse charge liability.
Valuation of Related-Party Transactions
Section 15(1) provides that transaction value is the price actually paid or payable, but only when the supplier and recipient are not related and price is the sole consideration.
Where the parties are related, Section 15(4) provides that the value shall be determined in accordance with the GST Valuation Rules. Rule 28 prescribes the following hierarchy:
- Open market value of the supply.
- If open market value is not available, the value of supply of goods or services of like kind and quality.
- If both are not available, 110% of the cost of production, acquisition or provision of services.
- If cost is also not available, a reasonable cost plus margin may be applied.
The supplier must document the valuation method and maintain evidence. In many cases, cost plus 10% is used for services, but open market value is preferred where comparable data exists.
Practical Compliance Steps
- Maintain a related-party transaction register.
- Identify every transaction, including free services, shared resources and loans.
- Determine whether GST is applicable under Section 7 and Schedule I.
- Apply valuation under Rule 28 and issue a tax invoice or self-invoice for reverse charge.
- Report in GSTR-1 and GSTR-3B and pay tax.
- Reconcile with the recipient's ITC and keep valuation worksheets for audit.
Common Mistakes
- Assuming no consideration means no GST.
- Using cost without adding the 10% mark-up where required.
- Ignoring corporate guarantees and interest-free loans.
- Not accounting for import of services from related foreign entities.
- Treating all related-party supplies as revenue-neutral without considering ITC restrictions.
How Anuj Desai & Associates Can Help
We help group companies identify related-party supplies, apply correct valuation, manage cross-border services, maintain documentation and defend GST valuations during audits and assessments.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
LinkedIn: linkedin.com/in/ca-anuj-desai-122547230