Transitional provisions related to credit under GST

[Abhishek Gupta]

Transitional Provisions for CENVAT Credit under GST

Need for Transitional Provisions

To facilitate the implementation of any new law or amendment in old law, role of transitional provisions comes into play. As India in gearing up for one of the biggest tax reform of its country, it is very important to read, analyze and assess the impact of GST Law and in amid these discussions of GST, transitional provision plays a very critical role for smooth migration to GST.

Implementation of GST from 1^st April, 2017 seems to be a challenging task. Finance Minister Shri Arun Jaitley after meetings with GST council has shared his concerns on the deadline of GST but he is trying his best for GST rollout. On Goods and Service tax council’s 7^th meeting, Shri Arun Jaitley said that “the drafts of Central GST and the compensation law have been mostly approved with the only portions relating to dual control being left out”. Next step will be to look into the drafting of IGST Act.

But, yes we can say that GST is an unquestionable new indirect tax of India. It may be deferred but yes it will come.

Chapter XXVII of Model GST Law prescribes the transitional Provisions under GST.

Transitional provisions are very important for exiting indirect tax payers as it will enable them to migrate into different aspects like migration, CENVAT Credit, sales return, job work, refund, pending contracts, stock transfers etc.

1. Closing balance of CENVAT Credit

Section 167 of Model GST Law provides for the amount of CENVAT Credit carried forward in a return to be allowed as input tax credit.

This would be a facilitating section allowing the assesse to carry forward their closing balance of CENVAT Credit under current indirect tax laws regime to GST regime. CENVAT credit can be related to input, input service and capital goods as defined in CENVAT Credit Rules, 2004.

Balance of CENVAT Credit carried forward in the return will become opening balance of input tax credit in electronic credit ledger. This balance of CENVAT credit will be known as CGST (central goods & service tax).

What is electronic credit leger in GST?

All the input taxes under various major heads i.e. CGST, SGST and IGST shall be credited to an electronic ledger. Any availment of input tax credit will be credited in the ledger and any utilization, refund, reversals will be debited in the ledger.

Section 2(43) of Model GST Law, “electronic credit ledger” means the electronic credit ledger referred to in section 44(2).  

As per section 44(2) self-assessed input tax credit shown in the return will be credited in a ledger which will be called as electronic credit ledger.

GST will subsume VAT and entry tax in itself, therefore, closing balance of VAT and entry tax carried forward in a return shall be entitled for input tax credit. This balance of Vat or entry tax will be known as SGST (State Goods & Service tax).

Eligibility of Input tax credit in GST

Following conditions needs to be considered before carrying forward the said credit:

1. The CENVAT Credit must qualify as admissible input credit under both, the existing law and the GST Law.
2. The CENVAT Credit must have been reflected as input credit carried forward in the return filed for the last period under existing law.

It is important to note that the admissible CENVAT Credit as per last return filled under current indirect tax laws would be considered and recognized. The closing credit balance in book of accounts would be immaterial.

2. Credit on capital goods not carried forward in return to be allowed as ITC

In respect of capital goods, under the CENVAT Credit Rules, 2004, only 50% credit can be availed during the first year. The remaining 50% of credit can be availed in any of the subsequent financial years.

This section enables a registered taxable person to avail the balance un-availed CENVAT Credit in his electronic credit ledger. The expression “un-availed CENVAT Credit” means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods by the taxable person under the earlier law from the aggregate amount of CENVAT credit to which the said person was entitled in respect of the said capital goods under the earlier law.

A registered taxable person is not allowed to avail credit under this section unless CENVAT Credit was admissible to him under the earlier law and GST as well.

It is very important to recap here that time limitation of availing credit from 1 year from date of invoice is applicable only on inputs or input services and not on capital goods.

Similarly a registered taxable person can take in his electronic credit ledger, the un-availed input tax credit(levied under state VAT laws) in respect of capital goods, which is not carried forward by such taxable person in his return filed for the period immediately preceding the appointed date.

3. Credit of eligible duties and taxes in inputs held in stock to be allowed

A registered taxable person will be allowed to avail CENVAT Credit of duties paid on inputs held in stock, contained in semi-finished goods or finished goods held in stock, on the appointed day, subject to certain conditions. Such registered taxable person should have been-

1. Person not liable to be registered under earlier law
2. Engaged in manufacture of exempted goods or provision of exempted service
3. Was providing work contact service and paying tax on abated value
4. First stage dealer or second stage dealer or registered importer

Under the earlier draft of Model GST law kept in the public domain in June 2016; this provision is applicable only for those who is not liable to be registered under the earlier law or manufacturer of exempted goods

As inputs can also be used by a service provider or first stage dealer or second stage dealer or register importer, this facility has been now extended to them also by virtue of section 169 of revised model GST law.

Similarly, in case of VAT or entry tax, a person who has not liable to be registered under the respective VAT laws or who was engaged in the sale of exempted goods under the earlier law but liable to pay tax under this act can also take input tax credit in electronic credit ledger.

4. Credit of eligible duties and taxes in respect of inputs held in stock to be allowed in certain situations

A registered taxable person who was engaged in manufacture of non-exempted as well as exempted goods or provision of non-exempted as well as exempted services shall be entitled to take in ledger credit carried forward in return and credit of inputs held in stock relating to exempted goods or services.

5. Credit of duties and taxes in respect of input and input services in respect of goods in transit

It may be happen that the goods may have been dispatched before the appointed day, on payment of appropriate excise duty, service tax, and Vat or entry tax, however the same were received by the taxable person after the appointed day.

In such a situation, a registered taxable person receiving such goods and or services after the appointed day, on which appropriate duty or tax has been paid under the earlier law shall be entitled to take in his electronic credit ledger the amount of tax paid earlier.

The condition to be fulfilled to avail such credit shall be that the bill or invoice should be recorded in the books of accounts within a period of thirty days from the appointed day. Also, assessee shall furnish a statement in respect of credit that has been taken.

6. Credit of duties and taxes on inputs held in stock while switching over from the composition scheme

Where a taxable person has opt for composition scheme under earlier law paying tax at a fixed rate or paying a fixed amount instead of the tax payable amount and paying tax at normal rate in GST, then he is entitled to take credit in electronic credit ledger of inputs held in stock subject to following conditions:-

1. The inputs or goods should be used for making taxable outward supply under the GST
2. Assessee should not be working under composition scheme
3. Taxable person is eligible for availing input tax credit on such inputs
4. Taxable person is in possession of supporting documents
5. Such documents were not issued earlier than 12 months immediately preceding the appointed day

Illustration:

X ltd. registered in Delhi is manufacturing medical equipment’s on which 10% excise duty is applicable and is providing health care services which is exempted by notification number 25/2012. Also, Delhi vat @5% is payable on sale of medical equipment’s. No composition scheme is opted by X ltd under earlier law as well as under GST law. X ltd. is also engaged in inter-state sale of goods attracting CST@2% and paying Octroi (entry tax) on receipt of goods in Delhi.  

In 2016-17, the following data is available:

Closing balance of CENVAT credit shown in last return:

1. Capital Goods on plant and machinery purchase on 8^th August, 2016(50%)- ₹ 1,00,000
2. Inputs-Rs 25,000
3. Input services- ₹ 20,000

From above closing balance, credit of input service of value ₹ 1,000 is eligible as per CCR, 2004 but not eligible under GST.

Closing balance of credit of VAT shown in last return: ₹ 10,000

Closing balance of credit of entry tax shown in last return: ₹ 12,000

Credit attributable to section 3, 5(3), section 6 or section 6A of the CST Act, 1956 claimed within the time of rule 12 of CST(Registration and turnover) Rules, 1957- ₹ 6,000

CENVAT credit of inputs held in stock exclusively used for exempted health care service is Rs. 15,000

On 28^th March, 2017 Y ltd, a vendor of X ltd. removed goods from factory and pay excise duty of ₹ 2,000 on it. These goods are received by X ltd. on 4^th April, 2017.

Details of April’ 17 is as follows:

Supply of medical equipment’s (amount of sale) ₹ 20, 00, 000

Supply of health care services ₹ 10, 00, 000

Out of above supplies, X ltd. made inter-state supply of value ₹ 5, 00, 000

Rate of CGST, SGT and IGST are 9%, 9% and 18% respectively.–

Suggest tax compliances as GST will roll-out on 1^st April, 2017 considering an assumption that supplies of goods or services made by X ltd. will be taxable under GST.

Solution:

       As per section 167 of Model GST Law:

       Closing balance carried forward in return will become input tax credit under GST

Input tax credit as per section 167 will be:

Particulars	Amount	Remarks
Capital Goods	1,00,000	It can be claimed as ITC in electronic credit ledger at any period of time. No time limitation is given
Inputs	25,000
Input Services	19,000
Total-CGST	1,44,000
		It can be claimed as ITC in electronic credit ledger within 90 days from the appointed day
VAT	10,000
Entry tax	12,000
Total-SGST	22,000

Refund of CST as per earlier law is allowed under section 167- ₹ 6,000

Input tax credit under section 168 of un-availed credit of capital goods is ₹ 1, 00, 000 (CGST)

Credit of inputs used for exempted service allowed under section 170- ₹ 15,000(CGST)

Credit of inputs received on 4^th April, 2017 allowed under section 171-Rs. 2,000(CGST)

Total input tax credit is:

CGST: ₹ 2, 61, 000(1, 44, 000+1, 00, 000+15,000+2,000)

SGST: ₹ 22,000

Supply of goods and service in April’2017:

Particulars	Amount
Intra-state supply of goods/services	₹ 25, 00, 000
Add: Taxes on intra-state supply:
CGST (9%)	₹ 2, 25, 000
SGST (9%)	₹ 2, 25, 000
Total GST on intra-state trade	₹ 4, 50, 000
Paid by:
Input Tax Credit(electronic credit ledger)
CGST	₹ 2, 25, 000
SGST	₹ 22, 000
Cash or bank(electronic cash ledger)	₹ 2, 03, 000
*for SGST payment credit of CGST cannot be utilized
Inter-state supply of goods/services	₹ 5, 00, 000
Add: Taxes on inter-state supply:
IGST (18%)	₹ 90, 000
Paid by:
Input Tax Credit(electronic credit ledger)	Nil
Cash or bank(electronic cash ledger)	₹ 90, 000

• Credit of CGST of ₹ 36,000(2, 61, 000- 2, 25, 000) will become opening balance of Feb’17
• First payment of IGST will be made in cash/bank as opening credit is not available.