GST consolidates multiple taxes into one. It is important to have rules in place to ensure that a registered business smoothly transitions to GST.
Input Tax Credit
Provisions have been made for the smooth transition of Input Tax Credit available under VAT, Excise Duty or Service Tax to GST. A registered dealer opting for the composition scheme will not be eligible to carry forward the ITC available in the previous regime.
Here are some of the cases where ITC transition provisions will be applicable:
Closing balance of credit on Inputs
The closing balance of ITC as per the last return filed before GST can be taken as credit in the GST regime.
The credit will be available only if the returns for the last 6 months i.e. from January 2017 to June 2017 were filed in the previous regime (i.e. VAT, Excise and Service Tax returns had been filed).
Form TRAN 1 has to be filed by 27th December 2017 to carry forward the Input Tax Credit. Based on the SC verdict, a special window was opened to allow taxpayers to file or revise TRAN-1 from 1st October 2022 up to 30th November 2022. Also, TRAN 1 can be rectified only once.
Credit on Capital Goods
Before GST, only a part of the input tax paid on Capital Goods could be taken as credit.
For example, if ITC on a Capital Good purchased in the year 2016-17 is Rs 10,000,
50% i.e. Rs 5,000 can be claimed as ITC in the same year and balance Rs 5000 can be claimed in the next year.
In such cases, there could be some amount of unutilised credit available on the capital goods. This credit can be carried forward to GST by entering the details in Form TRAN 1.
Credit on Stock
A manufacturer or a service provider who has goods lying in the closing stock on which duty has been paid can also take the credit for the same. The dealer has to declare the stock of such goods on the GST Portal.
The dealer should have the invoices for claiming this credit. Also, the invoices should be less than 1 year old.
What if you don’t have invoices?
Manufacturers or service providers who do not have an invoice evidencing payment of duty, cannot claim the credit under the GST regime. Only traders can claim credit in case invoice is unavailable, subject to the following conditions:
- The stock should be identified separately
- The credit can be taken by the trader only if the benefit of the same is passed on to the final consumer
How will credit be taken in case of no invoice?
|Rate of GST on Goods||Intra-state Credit to CGST||Inter-state Credit to IGST|
|18 % or more||60%||30%|
|Less than 18%||40%||20%|
Registered persons who were not registered under previous law
Every person who is
- A registered dealer and was unregistered under previous law
- Who was engaged in the manufacture of exempted goods or provision of exempted services
- Who was providing works contract service and was availing abatement
- A first-stage dealer or a second-stage dealer
- A registered importer
can also enjoy ITC of inputs in stock held on 1st July. The following conditions must be fulfilled –
- Inputs or goods are used for making taxable supplies
- Such benefit is passed on by way of reduced prices to the recipient
- Taxable person is eligible for the input tax credit on such inputs
- The person is in possession of invoices evidencing payment of duty under the earlier law
- The invoices are not older than 12 months
- The supplier of services is not eligible for any abatement under GST
ITC on Goods Sent Before 1st July
The input tax credit can be claimed by the manufacturer/dealer for those goods received after the appointed day, the tax on which has already been paid under previous law. The above credits would only be allowed if the invoice/tax paying document is recorded in the accounts of such person within 1st August 2017. A thirty-day extension may be granted by the competent authority on grounds of sufficient cause for delay.
Refunds and Arrears
Any claims/appeals pending for the refund on the due amount of CENVAT credit, tax or interest paid before 1st July shall be disposed of according to the previous laws.
Any amount found to be payable under the previous law will be treated as arrears of GST and be recovered according to GST provisions.
No tax shall be payable on Inputs, semi-finished goods removed for job work for carrying certain processes and returned on or after 1st July Conditions when there is no tax payable:
- Goods are returned to the factory within 6 months from 1st July (extendable for a maximum period of 2 months)
- Goods held by job worker Is declared in Form TRANS-1
- Supply of semi-finished goods is done only on payment of tax in India or the goods are exported out of India within 6 months from 1st July (extendable by not more than 2 months)
Taxes are not applicable if finished goods were removed before 1st July for carrying certain processes and are returned within 6 months from 1st July
Input tax credit will be recovered if the goods are not returned within 6 months
Credit Distribution by Input Service Distributor
Transition provisions will apply in cases where the service was received prior to 1st July and the invoices received on or after 1st July.ISD will be eligible to distribute input tax credit under GST.
When a registered dealer who was paying tax under composition scheme previously but is a normal taxpayer under GST can claim credit of inputs available as on 1st July by satisfying certain conditions –
- The input is used for taxable supply
- Registered Person is eligible for ITC under GST
- Invoice or other duty payment documents are available
- Such invoices are not more than twelve months old
Verification of Transitional credit by officer
The CGST Circular 182 issued on 10th November 2022 detailed the procedure for conducting verification of transitional credit claims made by migrated taxpayers during the special window opened between 1st October 2022 to 30th November 2022 on the GST portal.
The time-limit for verification of application for transitional credit claims made during this special window must begin by 1st December 2022 and end on or before 28th February 2023.
Following are the salient points that taxpayers must bear in mind while filing or revising TRAN-1-
- Apart from filing or revising TRAN form online, the taxpayer must submit a self-certified downloaded copy of filed or revised TRAN-1 and Annexure-A declaration with the jurisdictional tax officer. Follow the instructions given in the CGST Circular No.180 released on 9th September 2022.
- If you revise TRAN forms during this special window, the officer may reject such application if there are no changes found by giving the applicant a reasonable opportunity of being heard through an order.
- The selection of verifying officer depends upon whether the applicant falls under the Central or state/UT jurisdiction.
- Annexure-I of the guidelines applies for claiming of CGST transitional credit. However, the taxpayers must refer to respective state/UT guidelines for SGST transitional credit.
- Suppose there are both CGST and SGST components in tax, whether or not the administration comes under the Central or state jurisdiction, the tax officer must refer to the corresponding tax officer under the other component on a weekly basis with a list of GSTIN/ARN giving ten days time. The jurisdictional officer will complete verification within seven days of receiving such a report from the counterpart officer.
- If any appellate or adjudication proceedings stands pending, the officer can check the grounds for not accepting or approving the transitional credit in the notice or order.
- The counterpart verification officer who was referred to by the jurisdictional officer, upon finishing verification, must report the observations and order in the format in Annexure II of the guidelines. The amount of admission or rejection with reasons must be recorded.
- Generally, the jurisdictional officer must issue a report within fifteen days of the personal hearing and cannot exceed 90 days in any case.
- The taxpayer may be called upon to furnish more information and supporting documents, such as GST returns or invoices.
- If additional amount is creditted into the electronic credit ledger, such excess amount can be demanded and recovered from the applicant with interest and penalty.
Annexure-I – Checklist for verifying Transitional Credit
Following is the 12-point checklist, that can help taxpayers filing or revising their TRAN-1-
- Closing balance of CENVAT credit in Excise return 1, 2, or 3 or Service Tax return-3. Transitional credit in Table 5(a) = or less than closing balance of CENVAT credit (-) education or secondary education cess/SBC/KKC. Ensure that the last excise or service tax return was filed.
- Certain credits are not allowed to be claimed as transitional credit such as Education cess, Krishi Kalyan cess, clean energy cess, VAT credit and PLA balance.
- Ensure that last six months’ returns are filed before the date of transition. ER-1/ER-2 between Jan 2017 to June 2017, ER-3 and ST-3 for periods ending Mar 2017 and June 2017. Check this either for every unit that merged into one unit or for the single unit that split into many units, upon the implementation of GST.
- Make sure to report the transitional credit on capital goods in Table 6 alone, especially if the taxpayer is claiming second installment. Otherwise, reporting in both Tables 5(a) and 6 lead to double availment. If none of credit was earlier taken in pre-GST, this table is never used.
- If the migrated taxpayer used inputs that are exempted under the pre-GST regime, follow the Rule 6 of CENVAT credit Rules. Firstly, when only exempted goods are manufactured or exempt services are provided- Table 5(a) must be nil. Only credit on semi-finished goods as of transition date is made available. Secondly, both taxable and exempt supplies are made, transitional credit would flow into Table 5(a) and common credit must be reported in Table 7A.
- Keep a record of Credit Transfer Document (CTD) as a new taxpayer as laid down under the Rule 15 of CENVAT credit Rules.
- Transitional credit on stock must be reasonable, available upon sale and filing of TRAN-2. Matching of stock declared with its corresponding credit in VAT returns or supporting document must be ensured. In such cases, details flow from TRAN-2 into electronic credit ledger.
- Ensure the transitional credit is declared either in Table 5(a) of TRAN-1 or in TRAN-2.
- Ensure the existence of supporting document (duty paying document) and ensure it is accounted in books. Make sure ISD credits are availed as per the laws.
- Centralised registered units pass on the credits using Table 8 and so, the receiving units must not report this amount in their TRAN-1.
- Check if the service tax input credit is as per the Service Tax law and utilised for supplies done after 1st July 2017. Input VAT credit cannot be claimed as CGST credit.
- Most importantly, tax credits claimed through the filing of TRAN-1 or TRAN-2 cannot be reported in GSTR-3B. Otherwise, it tantamount to double credit.
To know more about TRAN 1 and TRAN 2 forms, go to – Transition of old input credits to GST regime