Transitional Provisions under GST regarding Cenvat Credit

While much has already been spoken about the seamless flow of credit under the GST regime by the GST campaigners, any transition to a new law should be impartial for the migrating tax payers to ensure its smooth acceptability. The transitional provisions covered in Section 140 to Section 142 of the CGST Bill, 2017 give clarity relating to events that may not have been finished as on the appointed day like closing balance of CENVAT credit, goods in transit, material sent for job work, stock of exempted goods which have now become taxable, etc. However, at the same time, these provisions also leave certain areas of doubt that would throw up certain challenges. The Article below summarizes the transitional provisions relating to CENVAT credit and input tax credit as per the CGST Bill, 2017 and UTGST Bill, 2017 as approved by the Lok Sabha on 29 March 2017.

1.1 Carry Forward of CENVAT Credit

• A registered taxable person, other than a person opting for the composition scheme, shall be entitled to carry forward under the CGST Act, the amount of CENVAT credit shown in the return furnished under the earlier laws for the period ending on the day prior to the appointed day.

• Similarly, the credit of VAT and entry tax available to a taxable person as per the last return furnished for the period ending on the day before the appointed day shall be eligible for carry forward under the UTGST Act. However, such returns under the earlier laws applicable to the respective Union Territory must be furnished within a period of 90 days from the appointed day.

• The carry forward of such credit under the CGST Act and UTGST Act shall not be eligible if any of the following conditions is satisfied:

i. Where the said amount of credit is not admissible under the GST Act; or

ii. Where the supplier has not furnished all the returns required under the existing laws for a period of 6 months prior to the appointed day; or

iii. Where the said amount of credit is in respect of goods sold under such exemption notifications as are notified by the Government.

1.2 Issues in Carry Forward of CENVAT Credit

While an effort has been made by the Government to ensure that the balance of CENVAT and VAT credit is available for carried forward by a taxable person, there are certain issues that require further clarity:

• CENVAT credit is a pool in which all credits are accumulated. The determination of composition of the pool to ensure that it contains only eligible credit as per the GST laws is a tedious task.

• The provisions relating to carry forward of CENVAT credit balance do not specify the eligible duties and taxes. Hence, the balance of Education Cess and Secondary and Higher Education Cess which may be a part of CENVAT credit balance as on the appointed day should be available for carry forward. However, this might be subject to dispute by the tax authorities, considering that such balance was of little use under the earlier laws, and in the absence of express provisions under the GST Act available for their carry forward.

• Under the Finance Act 1994, a service provider is eligible to avail CENVAT credit of the amount of tax paid under reverse charge. The liability to pay tax under reverse charge arises on the date of payment to the service provider. The date of payment to the service provider for services on which service tax has to be paid on reverse charge may be after the appointed day. In such case, service tax shall also be required to be paid after the appointed day. Whether the credit of service tax paid in such cases can be carried forward or not is an area of concern.

2. Availment of unavailed credit on capital goods

• A registered taxable person shall be allowed to carry forward the unavailed CENVAT and Input Tax Credit on capital goods, which has not been carried forward in the returns furnished under the earlier laws, subject to the condition that such credit is admissible under the earlier laws and the GST Act.

Unavailed CENVAT / Input TAX credit = Amount of credit admissible under the earlier laws –  Amount of CENVAT / Input Tax credit availed.

3. Availment of credit on goods held in stock to be allowed in certain circumstances

• A registered taxable person, who was not liable to be registered under the earlier law or was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract services and was availing the benefit of Notification No. 26/2012-ST dated 20 June 2012 or a first stage dealer or a second stage dealer or a registered importer shall be entitled to take credit of eligible duties and taxes in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions:

1. Such inputs or goods are used or intended to be used for making taxable supplies under the GST Act;

2. The said taxable person is eligible for input tax credit on such inputs under this Act;

3. The said taxable person is in possession of invoice or other documents evidencing payment of tax under the earlier laws;

4. Such invoices or prescribed documents were issued not earlier than 12 months immediately preceding the appointed day;

5. The Supplier of services is not eligible for any abatement under the Act.

• The quantum of credit in this regard shall be calculated in such manner as may be prescribed.
• Such credit shall also be allowed to any registered taxable person other than a manufacturer or a supplier of services, who does not have is his possession any invoice or any other documents evidencing payment of duty in respect of inputs, subject to such conditions as may be prescribed.

For Example– A dealer who does not manufacture goods shall have with him stock of goods available with him on which excise may have been levied at the time of manufacture of goods. In this case, the dealer may not have an excise invoice as the goods bought are not used in the manufacture of goods. As per the aforementioned proviso, credit in respect of excise duty on goods held by him in stock as on the appointed day shall be available to him subject to such conditions as may be prescribed.

As per the recent rules issued by the CBEC with respect to the transitional provisions, such credit shall be allowed at the rate of 40% of CGST tax payable on the supply of such goods.

• Similarly, a registered taxable person who was not liable to be registered under the earlier VAT laws or was engaged in the sale of exempted goods shall be allowed the credit of VAT and entry tax paid on goods held in stock as on the day before the appointed day subject to the following conditions:

1. Such inputs or goods are used or intended to be used for making taxable supplies under the Act;

2. The said taxable person is eligible for input ax credit on such inputs under this Act;

3. The said inputs were not specified as those inputs on which credit was not admissible under the earlier law;

4. The said taxable person is in possession of invoice or other prescribed documents evidencing payment of tax under the earlier law in respect of such inputs; and

5. Such invoice or other prescribed documents were issued not earlier than 12 months immediately preceding the appointed day.

• In this regard, the quantum of credit shall be calculated in such manner as may be prescribed.

4. Transitional Provisions for Person Engaged in Exempted and taxable activities

A registered taxable person who was engaged in the manufacture of exempted and non exempted goods under the Central Excise Act, 1944 or the provision of exempted services and non exempted services under the Finance Act, 1994 shall be allowed to carry forward:

1. The balance of CENVAT credit shown in the return furnished for the period ending on the day before the appointed day; and
2. The amount of CENVAT credit in respect of inputs held in stock on the day before the appointed day.

Further, similar provisions exist under the UTGST Bill 2017 for a person dealing in taxable and exempted goods under the respective VAT and entry tax laws applicable to the respective Union Territory.

5. Transitional Provisions in respect of inputs and input services in transit on the appointed day

A registered taxable person shall be entitled to take the credit of eligible duties and taxes in respect of inputs and input services received after the appointed day in respect of which tax has been paid under the existing laws, subject to the condition that invoice or any other document evidencing payment of duty was recorded in the books of accounts within 30 days from the appointed day.

In this regard, the credit of Excise duty and Service tax in respect of inputs and input services shall be availed under the CGST act, whereas the credit of VAT and entry tax on inputs shall be availed under the UTGST Act.

It is pertinent to note that there are no such provisions to avail CENVAT credit and Input Tax Credit in respect of capital goods in transit as on the appointed day.

6. Transitional Provisions for eligibility of credit to a taxable person switching over from composition scheme under the earlier tax laws

A registered taxable person who was either paying tax at a fixed rate or paying a fixed amount in lieu of tax payable under the earlier central or state laws, referred to as composition taxpayer, shall be entitled to take the CENVAT credit of eligible duties and tax under the CGST Act and the credit of VAT and entry tax under the UTGST Act in respect of stock held on the appointed day subject to the following conditions:

1. Such goods held in stock are used for the purpose of making taxable supplies under the GST Act;
2. The said person is not paying tax under the composition scheme under the GST Act;
3. The said person is eligible for input tax credit in respect of such inputs under the GST Act;
4. The said taxable person is in possession of invoices or other documents evidencing payment of duty which were issued not earlier than 12 months from the appointed day.

In this regard, the amount of credit shall be calculated in such manner as may be prescribed.

7. Other Miscellaneous Transitional Provisions Relating to Cenvat Credit

• Under the earlier laws, a service provider providing services from multiple locations in the country having centralized registration had one pool of CENVAT credit. However, under GST laws, he shall be required to obtain registration in each state from where he makes taxable supplies. In such a scenario, the common credit balance carried forward from the earlier laws can be used to set off output tax liability in any state in the country.

• In case of an Input Service Distributor, input tax credit in respect of any services received prior to the appointed day shall be eligible for distribution under the GST Act, even if invoices issued in this regard, are received after the appointed day.

• Where any CENVAT credit availed on input services under the earlier laws is reversed on account of non payment of consideration within a period 3 months, such credit can be reclaimed under the GST Act provided the taxable person has paid the consideration in respect of such input services within 3 months from the appointed day.

• Where any input tax credit has been reversed on account of branch transfers under the earlier laws, the same shall not be admissible as input tax credit under the GST Act.

Conclusion

In order to ensure that transition to GST is rational and righteous, efforts have been made to ensure that transition to GST does not result in loss of input tax credit available under the earlier laws. Further, provisions to avail credit on stock for a person whose activities have become taxable under the GST laws have also been introduced. However, what remains to be seen are the rules that shall be framed in this regard to calculate the quantum of credit in various cases discussed above.

(The author is a practicing Chartered Accountant based in Delhi and can be reached at [email protected] or 9811933762)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied without express written permission of the author.

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