GST- Transitional Issues in Credits

GST - Transition challenge on Credit, Carry forward and Claim through declaration

Introduction

Tax credit in any value added taxation is the second most important aspect after the levy as it goes to reduce the basic cost. It provides that only on the value added at each stage tax is paid. Most times the GST payable rate maybe far in excess of the gross margin of the assessee.

In the GST regime there would be 3 tax parts and consequently 3 input tax credit parts as under:

Central Goods & Service Tax Credit – The CGST is payable on all transactions of supply of goods or services at rates to be prescribed whether within the State or Outside. This accrues to the Centre.

State Goods & Service Tax Credit – The SGST is payable on all transactions of supply of goods or services at rates prescribed whether within or outside the State. This amount accrues to the State of destination in normal course. See chapter on Intra/ inter State supply for understanding when destination principle may not apply.

Integrated Goods & Service Tax Credit – The IGST is payable on all transactions where supply is interstate. The rate would be a combination of the State and Central GST. It is expected that a standard rate may be prescribed for transaction liable to IGST. Maybe applicable for imported goods, stock transfer outside the State.

The availment of credit by the assessees therefore would be in 3 different baskets. It is possible that there could be some accumulation of one or the other depending on the type of transactions and mode of distribution of goods or services.

The eligibility of utilization could be as under:

1. CGST could be used to pay CGST or IGST. Cannot be adjusted towards SGST.

2. SGST could be used only to pay SGST. Cannot be adjusted towards CGST or IGST.

3. IGST could be used first to pay for IGST then CGST and then SGST. Can be adjusted with any tax but in order specified.

The input tax credit [CGST/ SGST or IGST] could have eligibility criterion for credit as under:

1. When goods or services are procured for supply/ resupply (resale), then credit is available for all.

2. The credit on goods or services which are in the restricted list also are eligible for credit when resold.

3. When any capital goods are procured for the business other than the ones which are specifically excluded. [ Maybe Motor Vehicles ]

4. When inputs and consumables are procured for the manufacture and supply of goods other than those which are specifically excluded as ineligible.

5. When goods or services are procured by the resident agent within the State. The agent is required to pay the GST on his supplies but not eligible for the credit on supplies made on behalf of the principal.

Input Tax Restrictions

1. Input tax may not be deducted in respect of

2. Goods services supplied by unregistered person unless GST paid under reverse charge.

3. Tax paid on supply of goods and services related to supply or manufacture or processing or packing or storing of exempted goods and services, except when such goods are exported.

4, Tax paid on restricted goods such as those specified when such goods not used for

5. Supply of goods (resale) or,

6. manufacture or any other process of other goods for further supply(sale) and

7. used for supply of services.

8. Tax paid on petroleum products when used as fuel to motor vehicles except when used as fuel in the production and supply of goods.

9. The input credits may not be available if the inputs are lost/ destroyed/ damaged prior to them having entered the manufacture or service process.

10. ITC would not be available unless supply of goods or service is evidenced by tax paying documents.

11. When deduction/ abatement claimed and tax paid only on part of value if conditions prescribe no credit availment.

12. When special rates prescribed for small businesses or lower rate prescribed under special schemes.

The GST envisages seamless credit. Therefore it is expected that the restrictions on tax credits would be at a minimum. The credit of service tax would be available for payment of CGST. Except of the 1% CST levy to continue for 2 years all taxes would be available for credit.

The reasonable restrictions on no credit for exempted goods as well as for personal and non business use would continue.

Documents on which credit is eligible.

The documents on which credit could be availed could be as under:

1. Bill of Entry where GST is charged,

2. Supply Invoice for Goods or Services [ issued by manufacturer, dealer or service provider],

3. GST payment challan,

4. Supplementary Invoice for Goods or Services,

5. Certificate of Customs appraiser

6. Any other document specified/ prescribed in the rules.

Transfer of Credit

In normal course the transfer of GST credit would not be available. However in cases of Large Tax Paying Units this may be allowed.

Transfer would also be available in case of shifting of factory/ place of business, merger, acquisition and similar events. However some safeguards maybe put in place. 

Transitional Provisions

In the initial stages of implementation of GST two critical activities are to be carried out:

1. Carry Forward of Credit under VAT, Service Tax, Central Excise. As per the books to GST.

2. Duty / tax paid on stocks on which credit has not been availed as they were not admissible in earlier period. This could be:

3. CST which was not allowed as credit to manufacturers/ service providers or dealers,

4. Central excise on goods procured by dealers/ service providers,

5. Additional duties of excise credit for imported goods to dealers,

6. VAT credit not availed by service providers

7. All taxes on those who were not liable / exempted in earlier regime.

Most businesses have at least 2 months of stocks of goods in raw material, work in process or finished stage. On these stocks, credit may have been availed partially or not at all. Under GST any tax or duty paid on the goods which are in future going to suffer GST would be eligible for credit.

The quantitative confirmation of stocks in hand as on date of transition would be important. Assessees may plan for taking the stocks in all the places where they exist. This would cover the goods for resale, job work as also the capital goods. This may require certification by a Chartered Accountant or other professional.

These stocks maybe represented by duty/ tax paying documents wherein proportionate credit could be claimed. In case tax quantum not available in the documents, then the rules would have to be referred on how and to what extent credit could be claimed.

The carry forward of credit as well as the declaration/ claim for credit on stocks in hand are detailed in chapter on Transitional challenges which also includes a check list for verification.     

Ineligible Credit

The GST law would not allow credits on all GST paid on receipt of goods and services. Credit could have been availed in excess, ineligible credits taken, reversal  of credit for non business / personal use not done. Credit available in SGST maybe used for CGST or credit available in CGST may be used for payment of SGST. At times the assessee maybe supplying both taxable and non taxable goods/ services. In these cases a simple method of proportionate credit reversal needs to be put in place rather than formulae’s like the Rule 6 (3) of the CCR 2004.

In all such cases the interest and penalties would be attracted.

Cost of eligible credit not availed.

The past experience in indirect tax laws indicate that there are several reasons why credits are not availed. In normal circumstances all credits are to be taken, unless restricted or barred. This could be due to lack of knowledge, proper system of accounting not followed, non integration of credits to accounting package among many other reasons.

The credit when not availed would directly increase the cost of services or goods and be a hit on the net profit of any enterprise. This may also lead to losing out on orders due to not being competitive.  

Time Limit for Credit

Presently under many of the VAT laws as well as the cenvat credit rules, the credit is available only for invoices of the last 6 months/ 1 year. Therefore old invoices credit would not be available.

Under GST it is hoped that this practice would not be continued as when tax is payable for the past the availment of credit should also be allowed for the past. The quantum and percentage of credit under GST as a proportion of the goods would be very high. The stated objective of GST to allow seamless credit would also not be furthered if time limits were put in place.

Carry forward of stock as on transition date

As on the transition date, an Assessee may have stock of goods in the nature of raw material, packing material, consumable, stores, fuels, semi-processed goods, finished goods and capital goods lying.  The said stock including capital goods may be subject to GST on subsequent supplies. Transition provisions are required to provide a clear procedure for transitional credit on such stocks including on capital goods.

Refund of Credit

The refund of credit would be eligible normally where the accumulation is due to supply to 100% EOU, SEZ or exports. One of the major advantages of GST is that the goods and services from India would not have components of tax as a cost. This would ensure that the exporters can compete with suppliers across the globe who also would not allow taxes to stick to their goods or services.

One of the simple methods of providing these benefits is to allow refund in cash immediately. In fact travelers in USA and Europe may remember that they can claim the VAT paid in the visited country at the airports and at times the refund is given across the counter. Even for business enterprises the refund takes not more than 1 week. This speed needs to be emulated by the Government in India. Verification of the documentation needs to be done post refund sanction only.   

< > lying at job-workers premises

The goods (after being processed) are lying at job-worker’s premises on the implementation date and would be returned back to the principal

The goods are being used by the job-worker for further processing

The goods are in the nature of capital goods

< > lying with agentsPotential Concerns:

The possible situations with respect to goods lying at Agent’s premises are:

Under the current system of taxation, an Assessee may have filed refund of input tax or rebate claims, which may be pending before the adjudicating authority or appellate authority for disposal. Transition provisions are required to provide a clear procedure for protection of pending refund claims.

An Assessee may have paid tax on goods in the current regime which may be in transit before delivery to customer and is received by the said customer post implementation of GST or may be pending with customer for sale by approval. Transition provisions are required to provide a clear procedure for mechanism to avail transitional credit on goods in transit or pending for approval.

Transition provisions are required to provide a clear procedure for mechanism to avail transitional credit on goods in transit or pending for approval.

Potential Concerns:

The possible situations on transit goods are:

The central excise duty and CST paid on stocks [in hand, in semi finished and finished goods] and capital goods used for business and VAT missed for procurement in pre GST period are eligible for credit under GST.

However for the unaccounted stocks or stocks not represented by valid duty/ tax paid invoices, the credit would not be available.

Now with product or service becoming liable for GST for 1st time, the credit for stock in hand of which CST, Central Excise or VAT,CVD as well as SAD has been paid would be eligible.

Manufacturer or service provider or dealer may have reversed credit under protest in pre GST period. This would have to be close out with the due process of law under the old law and if eligible for refund under the old provisions.

Claim through declaration

How to Get awareness / start practice in GST?

Conclusion:

Input Tax Credit being an important part of any business at times exceeding the net margin of the business needs to be understood comprehensively. Businesses may necessarily have to enable maximum credit to be able to survive in this competitive world. The non availment of ITC on restricted categories would avoid the cost of interest and penalties. India is slowly increasing its exports would also have many situations where the SGST, IGST and CGST would be accumulating. It is imperative that speedy refund without any delays and restrictions is put in place as it also leads to high transaction cost. The businessman always ensures that his margins are protected and availing credit under GST which could be upto 20% of the cost would obviously be critical to keeping oneself viable.

Appendix 1:

DECLARATION FORM FOR STATE LEVEL TRANSITIONAL CREDITS

(To be filed before the Jurisdictional State GST officer)

To,

The Jurisdictional GST Officer

 …………………..

Sir,

 I/We ………… (name) …………….. (TIN) and GST no.………………… (address) do hereby declare that the refund / rebate of tax (VAT / CST / General Sales Tax / Entry tax *) paid on goods held in stock on 31st March, 2016 is as under:

The goods are lying at Agent’s premises on the implementation date for sale therefrom

The goods are in the nature of capital goods

< > input tax credit < > credit taken under Pre-GST for tax paid on capital goods

Pending refunds

Tax paid on goods in transit or pending approval

The goods are in Transit

The goods are pending with the customer for approval before sale

Present Registered Dealer [Including Importer]:

Present Product/ Service being Exempt:

Credit Reversal Under Protest:

Other Transitional credit

1. Credit of VAT or CST paid on available stock- under existing State VAT Act

2. Balance 50% credit of CG- credit (CGST)?

3. Reversal of Credit: Manufacturer should be eligible for credit reversed in pre GST period due to non receipt of goods from job worker within 180 days. The credit on stock with the job worker therefore should be allowed.

4. Check if credit for SAD & CST paid on inputs and consumables available for the service providers on the stock available?

5. Credit reversed on - used after implementation of GST?

6. Sales returns after implementation of GST – ED & VAT.

7. Credit of TDS deducted under the existing VAT Act available as credit under GST law.

Under GST, the assessee must be allowed to carry forward the tax paid in the Pre-GST regime in respect of eligible inputs such as raw materials, component parts and inputs consumables, etc., whether or not lying in stock, provided the said amount was rightly availed and carried forward in the returns filed by the assessee.In this regard, the entitlement to carry forward may be subject to fulfilment of certain conditions such as transitional credit to be provided only in respect of goods that have suffered appropriate tax and in respect of which the assessee has maintained day-to-day stock records, etc., or as required under the law of the appropriate State.

The burden of proving that such goods have suffered tax would be on the claimant.Purchase invoices along with appropriate stock records must evidence tax paid on such inventory, which must be duly certified by a Chartered Accountant.

Under GST, the Assessee may be required to file a declaration [Appendix 1 &2] providing complete details of inventory lying in stock, which should be filed before the jurisdictional tax officer in the prescribed manner. The Prescribed Officer on satisfaction of the claim must issue a certificate which will entitle the dealer to avail the Credit under GST and carry forward the appropriate credit.

- Start focused reading/ practice in CST/ VAT, Central Excise or Service Tax now!!

- Use online resources – Google GST, CAclubindia, yahoo CA groups, taxindiaonline, linked in.

- Form a small group for GST in your area, meet regularly to understand the latest developments.

- Be ready before GST is implemented to add value to your organisation / clients.

- Read books/ attend seminars on topic

Eligible Input tax credit as per State Tax Return as on 31.03.2016 is Rs………….

< >

Sl. No

Value of Goods in Rs.

Rate of VAT / General Sales Tax / CST / Entry tax/other State taxes to be subsumed under the GST law

Tax paid as per the sale bills/ calculated as prescribed in Rs.

Transition relief Claimed in Rs.

# Note: Others (Ineligible input tax, URD purchases, etc.)  would include those items which has not been claimed as eligible input tax credit in serial number 1 and which are lying in stock as on 31.03.2016.

I/We undertake to maintain the records relating to the purchases on which relief is claimed for a period of two years and shall make them available for inspection by any authorised officer of the Commercial Taxes Department at any reasonable time.

Place: ………………                                                              Signature ………………………

Date : ………………                                                               Status ………………………….

Appendix 2:

DECLARATION FORM FOR CENTRAL LEVEL TRANSITIONAL CREDITS

(To be filed before the Jurisdictional Central GST officer)

To,

The Jurisdictional GST Officer

 …………………..

Sir,

 I/We ………… (name) …………….. Excise No./ST No./IEC No. and GST no.………………… (address)do here by declare that the refund / rebate of Excise duty/ Customs duty/Service tax/Swachh Bharat Cess paid on goods/services held in stock on 31st March, 2016 is as under:

Eligible Input tax credit as per Return under Cenvat Credit Rules, 2004/Service Tax Rules, 1994 as on 31.03.2016

< >

Sl. No

Value of Goods/Services in Rs.

Rate of Excise, Customs, service tax/Swachh Bharat Cess and other Central taxes/cess subsumed under the Central GST law

Tax paid as per the sale bills/ calculated as prescribed

Transition relief

Claimed in Rs.

# Note: Others (Ineligible input tax, Service tax paid by traders/wholesellers/retailers, etc.)  would include those items which has not been claimed as input tax credit and which are lying in stock as on 31.03.2016.

I/We undertake to maintain the records relating to the purchases on which relief is claimed for a period of two years and shall make them available for inspection by any authorised officer of the Central Excise/Customs/Service tax/Central GST Department at any reasonable time.

Place: ………………                                                              Signature ………………………

Date : ………………                                                               Status …………………………

Bibliography:

i. Goods & Service Tax in India – A primer – CCH Publication – Expected in August 2015.
ii. Excepts from the Research Committee of ICAI – Transitional Issues in GST.

CA Madhukar N Hiregange