When people hear “GST,” their first instinct is to think about the slab—5%, 12%, 18%, or 28%. But GST doesn’t live in thin air. The real question is: what exactly are you charging GST on? That’s where the concept of value of supply comes in.
If you get the value wrong, your GST amount is automatically wrong. That can mean overpaying and hurting your margins, or underpaying and inviting a notice from the tax department. So before you stress about whether it’s 12% or 18%, you need to nail down what’s actually being taxed.
What Does “Value of Supply” Mean?
In simple language, it’s just the price on which GST is calculated. The law calls it the transaction value—the price actually paid or payable when the seller and buyer are not related and the price is the only consideration.
Sounds straightforward. You sell something, that price becomes the value, GST is applied, done. But in the real world, business is never so clean. There are discounts, delivery charges, freebies, subsidies, and other quirks that make the number bounce around.
The Base Rule (When Life Is Simple)
Say you sell a fridge for ₹20,000. The customer pays ₹20,000. End of story. GST at 18% is ₹3,600, so the final bill is ₹23,600. Nobody argues here because everything is clean and above board.
I know a shop owner in Pune who laughs when he explains this example. He says, “If only all transactions were that simple, I wouldn’t need a GST consultant.” He’s right, because most transactions have little extras bolted onto them.
The Extras That Sneak In
Let’s say you sell a sofa for ₹30,000. The buyer wants it delivered home, so you charge ₹2,000 extra for delivery. Now, you might think GST applies only on ₹30,000 (the sofa), but the law doesn’t see it that way. That delivery charge is part of the supply. So GST applies on ₹32,000, not just ₹30,000.
This also covers packing charges, handling charges, or even subsidies that reduce the price (except for government subsidies, which are ignored). Basically, if it’s part of getting the product to the customer, GST includes it in the value.
The Messy World of Discounts
This is the part that causes the most fights during audits. Not all discounts reduce the GST value.
If you give a discount upfront and record it in the invoice, it’s fine—you deduct it from the taxable value. Example: You sell goods worth ₹50,000 and show a 10% discount right there in the bill. Value becomes ₹45,000, GST applies on that.
But what about discounts given later? Let’s say you promise a customer, “If you buy goods worth ₹1 lakh this year, I’ll give you a 5% bonus discount.” That’s allowed too, but only if it was agreed beforehand and linked to specific invoices.
What’s not allowed? Random, unplanned discounts after the supply. The law says you can’t reduce GST liability unless both sides had agreed to it from the start. I once heard of a wholesaler who gave unscheduled rebates to keep customers happy but didn’t document them properly. When auditors showed up, they disallowed the GST deduction. Painful lesson.
Free Supplies—Not Really Free
In normal life, giving something free feels generous. Under GST, not so much. If you send goods without charging money to a related party—like from your head office to a branch in another state—it’s still considered supply. And GST applies.
A company I know shipped goods worth ₹1 lakh from Delhi to its Mumbai branch without raising an invoice. The tax officer said, “Doesn’t matter, supply is supply.” They had to pay GST on the open market value of ₹1 lakh, even though no money moved.
So the next time you think of “free,” remember: GST has its own definition of that word.
When Buyer and Seller Are Related
Here’s another tricky bit. If the parties are related—say, a holding company selling to its subsidiary, or a director buying from his own company—the government doesn’t trust the invoice price.
Why? Because related parties could manipulate prices to dodge taxes. In these cases, GST uses different methods: open market value, price of similar goods, or cost plus 10%.
I’ve seen cases where a parent company sold machinery worth ₹8 lakh in the open market to its subsidiary for just ₹5 lakh. GST officers stepped in and taxed the full ₹8 lakh, saying that’s the real value of supply.
Other Oddballs
A few more special situations you’ll run into:
- Foreign currency transactions → The value is calculated using RBI’s exchange rate, not whatever rate your bank gives.
- Pure agent transactions → If you pay certain expenses on behalf of a client (like government registration fees) and recover it at cost, it’s not part of the supply value, provided you meet the “pure agent” conditions.
- Private subsidies → If a non-government entity gives a subsidy linked to price, it’s added back to the value. Government subsidies are excluded.
Stories from Real Life
Let’s bring it down to earth:
- A textile exporter sold shirts worth ₹2,00,000 but added ₹10,000 for packing. GST applied on ₹2,10,000, not just ₹2,00,000.
- A small shop ran a Diwali sale with 15% discount written clearly on the invoice. GST applied on the reduced amount.
- A company transferred machinery worth ₹50,000 to its branch office. Even without payment, GST applied on ₹50,000.
- A restaurant billed ₹2,000 for food and added ₹200 for home delivery. GST applied on the whole ₹2,200.
Everyday stuff, but the details matter.
Why It Matters
Messing up the value of supply is like building a house on a weak foundation. Even if the GST rate is correct, the calculation collapses if the base value is wrong. Buyers’ ITC claims may not match, auditors can disallow credits, and you either bleed cash or face penalties.
One trader told me he used to exclude delivery charges from GST to make bills look lighter for customers. It worked for a while, until reconciliation showed mismatches. He ended up paying not just the tax but also interest.
Wrapping It Up
The value of supply under GST is not just the sticker price. It’s the full economic value of what’s being supplied—price, delivery, packing, subsidies, sometimes even when no money moves. Discounts only work if they’re properly documented, and freebies to related parties aren’t really free in the taxman’s eyes.
So, when you raise your next bill, don’t just slap a number on it. Ask yourself: “What’s the real value here, all things considered?” That’s what GST cares about, and that’s what will keep your returns clean.
