Transitional Issues in GST on Textiles

There have been certain doubts as to admissibility of deemed credit of CGST on in-hand stocks of Textiles Cloth (and many other items which are related the genre of Textiles) for those person registered under GST which were not registered under Central Excise except the Manufacturers, i.e. the traders.

Background of the Issue

Chapter XX of the CGST Act, 2017 is in respect of provisions for the transition period.  Some of these provisions are enabling provisions for grant of CGST Credit/deemed SGST Credit. Proviso to Section 140(3) of the CGST Act, 2017 is one such provision that grants deemed CGST credit to the registered person not being a manufacturer or service provider in the prescribed manner and rate subject to certain conditions, limitations and safeguards. Rules prescribed under this section are commonly termed transitional rules though these are now part of the Central Goods and Services Tax (CGST) Rules, 2017, hereinafter referred to as the CGST Rules/the CGST Rules, 2017.

Textile cloth and many other items of the same category were exempt under Central Excise. As per the previous transitional rules, it was not specifically clear as to whether deemed credit of CGST in respect of these goods shall be admissible in GST regime or not as these were exempt under Central Excise.

Thus, doubts have been in the air as to whether CGST credit on deemed basis/specified percentage would be available under proviso to Section 140(3) of the CGST Act, 2017 on the textile cloth/goods which were exempt from whole of the duty of excise leviable thereon under the said Central Excise Act, 1944?

The draft of previous rule bearing number 3(a) was indicative that such credit was not available whereas revised Transition Rules issued on 19th of June, 2017 seem to have clarified the issue by appropriate addition and amendment in the relevant rules. The relevant transitional rule then numbered as Rule 3(a)(i) is now rearranged and re-numbered as Rule 117 (4) of the CGST Rules, 2017 applicable with effect from 1st of July, 2017.

Legal Provisions, Proviso to Section 140(3) and Rule 117

Proviso to Section 140(3)

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.

Rule 117

Rule 117 stipulates certain conditions, limitations, rate, manner and safeguards with respect to allowance of credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day, i.e. 1st of July, 2017 in case of a registered person other than a manufacturer or a supplier of services, who is not in possession of an invoice or any other documents evidencing payment of duty in respect of such inputs.

The said Rule 117 (4) of Central Goods and Services Tax (CGST) Rules, 2017 is recently notified vide Notification No. 3 /2017-Central Tax (Dated 19th June 2017) and is further amended by Notification No. 7/2017-Central Tax (Dated 27th June 2017), Notification No. 10/2017-Central Tax Dated 28th June 2017) and Notification No. 15/2017-Central Tax (Dated 1st July 2017).

Rule 117 (4) is applicable for deemed credit of CGST:

• for inputs held in stock and inputs contained in semi-finished or finished goods held in stock as on 01-07-2017
• for registered person other than a manufacturer or a supplier of services
• who is not in possession of an invoice or any other documents evidencing payment of duty in respect of such inputs

New Rule 117 quotes as hereunder:

Quote

Rule 117 (4) (a) (i)

(i) A registered person who was not registered under the existing law shall, in accordance with the proviso to sub-section (3) of section 140, be allowed to avail of input tax credit on goods (on which the duty of central excise or, as the case may be, additional duties of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975, is leviable)1 held in stock on the appointed day in respect of which he is not in possession of any document evidencing payment of central excise duty.

Rule 117 (4) (a) (ii)

(ii) The input tax credit referred to in sub-clause (i) shall be allowed at the rate of sixty per cent on such goods which attract central tax at the rate of nine per cent or more and forty per cent for other goods of the central tax applicable on supply of such goods after the appointed date and shall be credited after the central tax payable on such supply has been paid:

Provided that where integrated tax is paid on such goods, the amount of credit shall be allowed at the rate of thirty per cent and twenty per cent respectively of the said tax;

Rule 117 (4) (a) (ii)

(iii) The scheme shall be available for six tax periods from the appointed date.

Rule 117 (4) (b)

The credit of central tax shall be availed subject to satisfying the following conditions, namely:-

(i) such goods were not unconditionally exempt from the whole of the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not nil rated in the said Schedule;2

(ii) the document for procurement of such goods is available with the registered person;

(iii) the registered person availing of this scheme and having furnished the details of stock held by him in accordance with the provisions of clause (b) of sub-rule (2), submits a statement in FORM GST TRAN 2 at the end of each of the six tax periods during which the scheme is in operation indicating therein, the details of supplies of such goods effected during the tax period;

(iv) the amount of credit allowed shall be credited to the electronic credit ledger of the applicant maintained in FORM GST PMT-2 on the common portal; and

(v) the stock of goods on which the credit is availed is so stored that it can be easily identified by the registered person.

Unquote

Analysis of Legal Provisions, Rule 117

Please refer 1 and 2 herein above few words have intentionally been inserted in Rule 117(4) (a) (i) and Rule 117(4)(b)(i) has also been suitably amended as hereunder:

New Words inserted in Rule 117(4) (a) (i) as below:
On which the duty of central excise or, as the case may be, additional duties of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975, is leviable

[Rule 117 (4) (a) (i)]
Rule 117(4) (b) (i) amended as follows:

Such goods were not unconditionally exempt from the whole of the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not nil rated in the said Schedule;**

[Rule 117 (4) (b) (i)]

If we refer the old transition rules, we note that the words ,'on which the duty of central excise or, as the case may be, additional duty of customs under sub-section (1) of Section 3 of the Customs Tariff Act, 1975 is leviable' have been inserted in the new Rules with effect from 19th of June, 2017 only which are now part of the CGST Rules, 2017 with an intent to clear roads for deemed credit of CGST for the goods on which central excise/customs was otherwise leviable (though these goods might have been wholly exempt under Central Excise or Customs from payment of Central Excise or Customs)

And

Erstwhile relevant Rule 3(b)(i) was worded as, such goods are not wholly exempted from duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not Nil Rated ’meaning thereby, deemed credit to the Traders of Cloth was not available under Section 140(3) of the CGST Act, 2017 for the goods which were wholly exempt from Central Excise. The set of words, such goods were not unconditionally exempt from the whole of the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not nil rated in the said Schedule' paves way for admissibility of deemed credit on goods which were not unconditionally exempt under the pre-GST period.

Comparative Study of Old Rule 3 and New Rule 117

• * meant that on the goods wholly exempt under Central Excise/Customs, the deemed credit should not be available.
• ** i.e. these goods might have been exempt in pre-GST era but should be so exempt with some condition(s) and should not be unconditionally exempt in pre-GST era.

Studying in conjunction with each other, we infer that for admissibility of deemed CGST Credit on these goods, three basic conditions must be satisfied;

• Duty of central excise/customs duty must be leviable.
• Such goods must not have been unconditionally exempt from the whole of the duty of excise specified in the first schedule to the Central Excise Tariff Act 1985. Though these goods might be exempt in the pre-GST era but this exemption must be subject to one or more condition.
• These goods must not be Nil Rated in the Central Excise Tariff in Pre-GST era.

Looking in to whether Textile/other such goods comply with these three basic conditions or not, we find that;

• Duty of central excise/customs duty was leviable on these goods.
• These goods were not Nil Rated in the Central Excise Tariff in Chapter 50 to Chapter 63.

And

To arrive at as to whether such goods were unconditionally exempt or conditionally from the whole of the duty of excise specified in the first schedule to the Central Excise Tariff Act 1985, we refer relevant Exemption Notification number that conferred exemption from excise duty to textile/other specified goods.

Notification Number 30/2004-Central Excise dated 9th of July, 2004

Notification Number 30/2004-Central Excise dated 9th of July, 2004 provided for exemption to specified goods from whole of the duty of excise leviable thereon under the Central Excise Act, 1944.

Notification bearing Number 30/2004-Central Excise dated 9th of July, 2004 was issued under Section 5A(1) of the Central Excise Act, 1944 (1 of 1944) read with sub-section (3) of Section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) on 9th of July 2004, as amended up to date latest by Notifications No. 10/2005-C.E., dated 1-3-2005, corrigendum M.F. (D.R.) Corrigendum F. No. 334/3/2004-TRU (Pt. 1), dated 9-7-2004, No. 15/2006-C.E., dated 1-3-2006, No. 12/2009-CX., dated 07-07-2009, No. 12/2011-CX., dated 01-03-2011, No. 30/2011-CX., dated 24-03-2011, No. 11/2013-C.E., dated 1-3-2013, No. 34/2015-C.E., dated 17-7-2015,No. 37/2015-C.E., dated 21-7-2015 and No. 15/2016-C.E., dated 01-03-2016.

Relevant portion of this notification is quoted as below;

Quote

In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944) read with sub-section (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 07/2003-Central Excise dated the 1st March 2003, published in the Gazette of India vide number G.S.R. 137(E), dated 1st March 2003, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the excisable goods of the description specified in column (3) of the Table below and falling within the Chapter, heading No. or sub-heading No. of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) (hereinafter referred to as the Central Excise Tariff Act), specified in the corresponding entry in column (2) of the said Table, from whole of the duty of excise leviable thereon under the said Central Excise Act :

Provided that the said excisable goods are manufactured from inputs on which appropriate duty of excise leviable under the First Schedule to the Central Excise Tariff Act or additional duty of customs under section 3 of the Customs Tariff Act, 1975 (51 of 1975) has been paid and no credit of such excise duty or additional duty of customs on inputs has been taken by the manufacturer of such goods (and not the buyer of such goods), under the provisions of the CENVAT Credit Rules, 2004.  

Explanation. - For the purposes of this notification, appropriate duty or appropriate additional duty includes nil duty or concessional duty, whether or not read with any relevant exemption notification for the time being in force.

Unquote

Notification Number 30/2004-CE is a conditional exemption notification

 Section 5A of the Central Excise Act, 1944, empowers the Central Government to grant exemption from payment of duty. Under this Section the exemption from duty is granted either unconditionally or on fulfillment of some condition.  Notification No 30/2004-CE dated 9th July 2004 is also issued under Section 5A of the Central Excise Act, 1944 and is a conditional exemption notification.

As we study, the notification carries a rider in itself that is worded as,

'Provided that…………………for the time being in force'

We may safely conclude, this exemption was given in such a way that excise duty on such goods was exempt if:

1. the said excisable goods are manufactured from inputs on which appropriate duty of excise (including includes nil duty or concessional duty) leviable under the First Schedule to the Central Excise Tariff Act or additional duty of customs under section 3 of the Customs Tariff Act, 1975 (51 of 1975) has been paid

2. no credit of such excise duty or additional duty of customs on inputs has been taken by the manufacturer of such goods (and not the buyer of such goods), under the provisions of the CENVAT Credit Rules, 2004.  

So these goods were exempt and were conditionally exempt with above pre-conditions. These goods were not unconditionally exempt but were conditionally exempt.

Thus the condition as prescribed by Rule 117 (4)(b)(i) for grant of deemed CGST credit  that “such goods were not unconditionally exempt from the whole of the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985' is also complied with as the goods were so exempt conditionally and not unconditionally.

Trade notice no 03/2007 of the O/o CCE Delhi-III, dated 01.02.2007

This view is further supported by a trade notice no 03/2007 of the Office of the Commissioner of Central Excise Delhi-III, dated 01.02.2007 clarifying that Central Excise exemption to Textile Cloth and other Items vide Central Excise Exemption Notification Number 30/2004, was in fact a conditional exemption.

Para 3 of this Trade Notice, quotes,

Quote

'Therefore, it is clarified that non-availment of credit on inputs is a precondition for availing exemption under this notification and if manufacturers avail input tax credit, they would be ineligible for exemption under this notification. Reversal of credit on a later date would not suffice to make them eligible for this exemption.'

Unquote

Text of trade notice no 03/2007 of the Office of the Commissioner of Central Excise Delhi-III, dated 01.02.2007 is also reproduced herein below for your reference;

Government of India
Ministry of Finance
OFFICE OF THE COMMISSIONER CENTRAL EXCISE DELHI-III, UDYOG VIHAR,

Subject: Simultaneous

C.No.IV (16) Tech/DIII/3/07 TRADE NOTICE NO 03 /2007

Tel.No. 0124-2346931 Fax No. 0124-2349463
VANIJYA NIKUNJ, UDYOG MINAR, PHASE-V, GURGAON availment of Notification No. 30/2004-CE & 29/2004-CE both dated 9.7.2004 by the manufacturers of goods falling under Chapter 50 to 63 of the CETA, 1985- regarding

It is brought to the notice of all the members of Trade & Industry; that guidelines have been laid down by the Board for simultaneous availment of Notification No. 30/2004-CE & 29/2004 both dated 9.7.2004 by the manufacturers of goods falling under Chapter 50 to 63 of the CETA, 1985. The need has arisen in view of various representations received from trade and industry, as well as field formations in this regard.

Notification No. 29/2004-CE dated 9.7.2004 permits clearance of goods at concessional rates availing CENVAT Credit wherein a manufacturer can take CENVAT Credit on inputs. Notification No. 30/2004-CE dated. 9.7.2004 permits a manufacturer to clear the goods at 'Nil' rate of duty without availing CENVAT Credit on inputs. Further, Board's circular No. 795/28/2004-CX, dated 28.07.2004, issued by TRU had clarified that the benefit of these two notifications can be availed simultaneously provided the manufacturer maintains separate Books of Account for goods in respect of which benefit of notification No. 29/2004-CE dated 9.7.2004 is availed and similarly, for goods in respect of which benefit of notification No. 30/2004-CE dated 9.7.2004 is availed. However, it was brought to the notice of the Board that in such cases, certain manufacturers did not maintain separate accounts and availed credit on all the inputs. Subsequently, they reversed the credit availed on such inputs utilized for goods cleared under exemption notification No. 30/2004 as per the provisions of Rule 6(3) of the CENVAT Credit Rules, 2004.

 The issue has been examined. It is seen that proviso to notification No. 30/2004-CE dated 9.7.2004 states that 'nothing contained in this Notification shall apply to the goods in respect of which the credit of duty on inputs has been taken under the provisions of the CENVAT Credit Rules, 2004'. Therefore, it is clarified that non-availment of credit on inputs is a precondition for availing exemption under this notification and if manufacturers avail input tax credit, they would be ineligible for exemption under this notification. Reversal of credit on a later date would not suffice to make them eligible for this exemption.

However, it is seen that textile manufacturers/ processors have to use common inputs, which are used in a continuous manner, and it may not be practically possible to segregate and store inputs like dyes and chemicals separately or maintain separate accounts. In such cases, in order to facilitate simultaneous availment of the two notifications, such manufacturers may be advised not to take credit initially and instead take only proportionate input credit on inputs used in the manufacture of finished goods cleared by him on payment of duty. Such proportionate credit should be taken at the end of the month only. At the time of audit of records, or at any other time if the department requires, the assessee should support such credit availment with the relevant records maintained by them showing input quantity used for the goods manufactured and cleared on payment of duty. In case any subsequent verification reveals that such proportionate credit taken is incorrect, the penal provisions as prescribed under the law will be taken against such assessees.

(PIYUSHA PATNAIK)
COMMISSIONER

Dated 1st
Authority: Board Circular No. 845/03/2006-CXFebruary, 2007

The above trade notice pertains to Notification No. 30/2004-CE as amended up to 1st of February, 2007.

The inherent pre-condition clause as above has been since then substituted by Notification No. 34/2015-CE dated 17th of July, 2015 read with Explanation to it inserted vide Notification No. 37/2015-CE dated21st of July, 2015 as quoted above in “Analysis of Notification No. 30/2004-CE'

Further, in The Commissioner Of Customs (Exports) ,Custom House, No.60, Rajaji Salai, Chennai – 600001, Vs M/S Prashray Overseas Pvt Ltd 33/71-72, Nepali Khapra
Opp. Kashi Karwa Temple, Varanasi – 221001 And Customs Excise & Service Tax Appellate Tribunal, South Zonal Bench, Shastri Bhawan Annexe, 1st Floor, 26, Haddows Road, Chennai – 600006  delivered recently on  March 28, 2016 (2016-TIOL-1157-HC-MAD-CUS) it was so held that exemption under Notification No. 30/2004-CE is conditional exemption.

Thus having reliance on the Notification 30/2004-Central Excise dated 09-07-2004, Proviso to Section 140(3) of the CGST Act, 2017, Rule 117 of CGST Rules, 2017 effective from 01-07-2017, TRADE NOTICE NO 03/2007 dated 01-02-2007 and judicial pronouncements deemed credit on the following items on which excise/customs was leviable and though exempt but were not unconditionally exempt under pre-GST regime and which were not nil rated, should be available.

Textile Cloth and other items covered via above Notification No. 30/2004-Central Excise dated 09-07-2004 are as follows on which deemed credit as such should be available are as follows:

The author can also be reached at rks9814214503@gmail.com

The writer of this article is a Chartered Accountant having more than 17 years of experience in the field of indirect tax.He has authored a book on Punjab Value Added Tax, ‘Law and Practice of Punjab VAT’. He has to his credit many papers, published in National Level reputed tax publishers and presented at various National and State Level Forms.

The views expressed herein are the personal views of the writer. Readers are advised to act upon their own understanding /independent advice on the relevant law. This document is based on interpretation of the law. Therefore, the views expressed above are matters of opinion based on the laws prevalent at the time the view being expressed, which may change as the law evolves from time to time. We have no responsibility to update these comments for events and circumstances occurring after the date of this note, unless specifically requested. This note is for the specific purpose of serving as an informative guide and is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by us.