Reopening of TRAN 1 and TRAN 2 Forms and the Related Legal Concerns

[ManishRaj Dhandharia]

Introduction

With the introduction of Goods and Services Tax (GST), various taxes including value-added tax, sales tax, excise, etc. were brought under one tax. It became imperative that while transitioning from these taxes to GST, all the rights and liabilities of assessees were also transferred. Among these rights and liabilities, the most debated one relates to the availment of unutilized CENVAT credit or VAT credit i.e., credit pertaining to the erstwhile regime.

To provide such unutilized credit even under the GST regime, Section 140 was included in the Central Goods and Services Tax Act, 2017 (CGST Act) to provide for a smooth transition of CENVAT credit from the erstwhile to the current regime. Further, Rule 117 of Central Goods and Services Tax Rules, 2017 (CGST Rules) provides for furnishing of Form GST TRAN-1 and Form GST TRAN-2, as applicable, within the specified period. However, owing to various technical glitches and such other reasons, many taxpayers  were unable to file the requisite forms and thereby, failed to avail the credit.

Consequently, the Goods and Services Tax Network (GSTN) portal was directed to be re-opened various times through the order of different High Courts. The issue was finally settled with the order of the Supreme Court and Circular by the Department which has been discussed hereafter. Moreover, certain issues still remain unresolved which form the scope of the present article.

In the present article, a reference to the CENVAT credit with respect to CGST Act also connotes VAT credit in respect of SGST Law, however, the same has not been explicitly stated to avoid repetition.

Background - Supreme Court Decision in Filco Trade Centre case

On representation by various states and individual assessees, the Supreme Court, in the case of  UNION OF INDIA & ANR. VERSUS FILCO TRADE CENTRE PVT. LTD. & ANR. - 2022 (7) TMI 1232 - SC ORDER, directed the GSTN to open the portal for aggrieved assesses to file a fresh/revised form through TRAN-1 and TRAN-2. The premise of the decision is multiple technical glitches faced by assessees while filing the forms. Through the order, the Court directed to provide a two-month window starting September 01, 2022. However, later, vide Miscellaneous Application No.1545-1546/2022 dated September 02, 2022 UNION OF INDIA VERSUS FILCO TRADE CENTRE PVT. LTD. -2022 (9) TMI 514 - SC ORDER, the form was directed to be opened from October 01, 2022, to November 30, 2022. Pursuant to this, the officers shall have a 90-day-period to verify the claims, after which, the transitional credit should reflect in the Electronic Credit Ledger.

Guidelines issued through Circular No.180/12/2022-GST

Vide Circular No. 180/12/2022-GST dated September 09, 2022, the Ministry of Finance has laid down the guidelines for filing TRAN-1 and TRAN-2 forms. These guidelines can be summarised as follows:

1. TRAN-1 or TRAN-2 forms can be freshly filed by the assessees or earlier filed forms can be revised by them. Additionally, the furnished form can be downloaded.
2. While filing the form, the assessee is required to file a declaration which is available as Annexure-A as part of the Circular.
3. While filing TRAN-2, instead of a month-wise form, one consolidated form should be filed for the period in which such goods on which credit was availed, were supplied.
4. No claim for transitional credit shall be filed in table 5(b) & 5(c) of FORM GST TRAN-1 in respect of such C-Forms, F-Forms and H/I-Forms which have been issued after the due date prescribed for submitting the declaration in FORM GST TRAN-1 i.e. after 27.12.2017.
5. No further changes shall be allowed to make after submitting the form nor any further opportunity shall be given to fill the form since it is a one-time opportunity provided under the direction of the Supreme Court.
6. Where the credit has been successfully availed through TRAN-1 within 27/12/2017 or TRAN-2, there is no requirement for filing the form. However, where the credit availed by the assessee through TRAN-1 /TRAN-2 was wholly or partly rejected earlier during verification/ adjudication, the correct mechanism would be to go through the process of appeal rather than filing a fresh form on the portal. Since the option has been provided to the taxpayers who were unable to file their claims, it can be said that the option has now been given only for ‘claiming’ the credit. The taxpayers whose credit has been disputed by the Department cannot be given this option as they have already ‘claimed’ the transitional credit. Their dispute pertains to the amount of claim and not the fact of claim itself.
7. The entitlement of credit pursuant to filing the form shall be subjected to scrutiny by the Department, pursuant to which, the credit shall be reflected in the Electronic Credit Ledger.

Notable Aspects in relation to the Circular

1. Clarity on Concerns relating to GSTR-3B
   1. Credit availed through GSTR-3B

Subsequent to the technical glitches on the GSTN portal, many High Courts including the Calcutta High Court and Punjab and Haryana High Court in NODAL OFFICER, JT. COMMISSIONER, IT GRIEVANCE, GST BHAWAN VERSUS M/S. DAS AUTO CENTRE AND OTHERS - 2021 (12) TMI 835 - CALCUTTA HIGH COURT and HANS RAJ SONS VERSUS UNION OF INDIA AND OTHERS - 2019 (12) TMI 997 - PUNJAB AND HARYANA HIGH COURT respectively, allowed transitional credit to be availed through Form GSTR-3B rather than re-opening the portal for TRAN-1. Resultantly, many taxpayers in such jurisdictions filed GSTR-3B, leading to the conflict as to whether such taxpayers are required to now file TRAN-1/TRAN-2. The answer to this question is “yes” as Part-B of the Declaration (provided as Annexure-A in the Circular) mentions in point 4b regarding those assessees who claimed credit through Form GSTR-3B.

The relevant part of Part-B of the Declaration is extracted below:

“3) (a) *I/We have not claimed any credit, within the meaning of sections 140, 141 and 142 of the Central/ State/ UT Goods and Services Tax Act, 2017, in any return in FORM GSTR-3B filed by me/us; OR

4) (b) *I/We have claimed credit, within the meaning of sections 140, 141 and 142 of the Central/ State/ UT Goods and Services Tax Act, 2017, amounting to Rs.------- on account of central tax and Rs.------- on account of State/ union territory tax in my/ our return in FORM GSTR-3B filed by me/ us for the period --------and I/ we have reversed an amount of Rs.------- on account of central tax and Rs.------- on account of State/ union territory tax, along with an interest of Rs………….. vide <

>**/have not** reversed the said amount, along with applicable interest. I/We have neither been refunded nor have claimed refund or would claim refund of the credit of tax carried forward in accordance with sub-section 1 of Section 140 of the Central/ State/ UT Goods and Services Tax Act, 2017, in the return relating to the period ending with the day immediately preceding the appointed day, furnished by me/us under the existing law, in respect of which this claim of transitional credit is made.”

Another concern relates to those taxpayers who had to reverse the credit availed through GSTR-3B pursuant to the receipt of notice by the Department for mismatch between GSTR-2A and GSTR-3B. In such cases, if the taxpayer furnishes the form, the claimed amount shall be reflected in the Electronic Credit Ledger, subject to verification.

This situation can be categorised into three types:

1. 1. 1. Assessees who did not claim any credit through GSTR-3B - Point 3a
      2. Assessees who claimed credit through GSTR-3B but reversed it - Point 4b
      3. Assessees who claimed credit through GSTR-3B and have not reversed it - Point 4b
   2. Refund of interest paid

In many cases, the credit availed through GSTR-3B was later reversed along with interest. This was mainly the case with the small businessmen whose amount involved was not huge and therefore, did not prefer litigation. In light of the Supreme Court decision and Circular, the author is of the view that the interest paid should now be refunded to the taxpayer if the claim is legitimate and was not required to be reversed. However, the Department or the Court has not provided any clarity on the issue.

1. 3. Regularisation of credit availed

Lastly, the Circular will ensure that the availment of transitional credit through Form GSTR-3B can be regularised by bringing it under one umbrella. The whole confusion caused by availing of credit through GSTR-3B and then later adjudication being done could be avoided by now filing TRAN-1 along with the declaration.

2. Credit availed through GSTR-3B which is under litigation

As mentioned previously and also mentioned in the Circular, any assessee whose claim through TRAN-1 /TRAN-2 has been partly/wholly rejected should go through the appeal procedure to decide the merits of the claim.

However, there have not been any explicit instructions for those taxpayers whose issue is under litigation for availing transitional credit through GSTR-3B. In such cases, it may be noted that it shall be apt for such taxpayers to now avail the credit through TRAN-1 /TRAN-2 forms on the GSTN portal. This is so because, in all these pending cases, the issue is related to the validity of availing of credit through GSTR-3B and not to the eligibility/merits of the claim. Hence, it shall be appropriate for an assessee to file a fresh form on the portal. .

3. Anti-profiteering concerns

While transitioning from the erstwhile to the present regime, many small-scale traders not registered earlier, got themselves registered under GST. In such a situation, the stock lying as on June 30, 2017, was already excise duty paid and would have again been subjected to GST leading to a situation of double taxation. To curb this situation, the Department allowed for availing 60% of the CGST portion as credit on unsold goods (as on June 30, 2017) where rate of GST was GST 18% or more, and 40% of the CGST portion as credit on unsold goods (as on June 30, 2017) where rate of GST was 12%. Such credit was allowed by filing details of supplies of such stock, in TRAN-2. It is also pertinent to note that such taxpayers were required to pass on the benefit of such credit to their consumers by way of discount. Such sales were required to be made between July 2017 and December 2017.

Now, let us consider a case where the assessee failed to file TRAN-1 and TRAN-2 however he had duty paid stock of goods lying as on 30/06/2017. If such an assessee files TRAN-1 and TRAN-2 now, there would be a challenge to establish whether the benefit was duly passed on to the consumer or not.

A logical conclusion, in the view of the author, is that even if the assessee would not have passed on the benefit directly, the market forces of demand and supply would have forced him to change the prices as other traders (who availed the benefit) would have sold the goods at a lower price. Hence, intentionally or unintentionally, the consumers would have availed of the benefit and hence, the assessee should be allowed to avail the credit.

4. Accounting treatment of credit availed

If the assessee has already treated the credit as an asset during the introduction of the GST regime, then no change will be required in the Profit and Loss Account and the asset will required to be merely converted into ITC. However, if the transaction is yet to be recorded in the books of account, then the assessee shall treat the transitional credit as an income in the books of account and Profit and Loss Account will be accordingly credited.

5. Relief from Exemplary Costs by Assessment of Credit

Initially, the transitional credit was availed by the assessees and their claim was verified later which led to the imposition of interest and penalty along with the reversal of the input tax credit if the claim was rejected. However, with the issuance of the Circular, it has been made clear that a 90-day period will be given to the Department pursuant to which the credit would be given and reflected in the Electronic Credit Ledger. This will help an assessee to prevent the imposition of any interest/penalty as well as save litigation costs.

Conclusion

The guidelines issued by the Department in light of the recent Supreme Court decision shall definitely come as a relief for many aggrieved assessees. However, with the issuance of the Circular, many new conflicts seem to unfold as discussed above and it shall be interesting to see the stance of the Department as well as the judiciary on these issues.

The requirement of allowing transitioning of credit into GST was to ensure that the taxpayers who were exempted from excise or VAT during the erstwhile regime but were supposed to pay GST on outward supplies on the stock purchased prior to 01/07/2017, get the benefit of the input tax credit. Hence, such a benefit is a vested right that many taxpayers failed to avail due to technical glitches or other such issues. Therefore, the judgment of the Hon’ble Supreme Court has been welcomed by taxpayers who can avail the credit now.

Lastly, it is imperative to mention that this is the last opportunity available to the assessees and hence, the assessees should consciously make use of the opportunity by following the above-mentioned guidelines applicable in their case.