Background

The Government introduced GST with effect from 1 July 2017. The introduction of GST was a historic change in the Indirect Tax regime in India which replaced multiple indirect tax levies with single levy that is GST.

In this article, an attempt has been made to analyse the deemed input tax credit in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the 30 June 2017. The discussion in this article is limited to situation where eligible duty paying documents are not available with the registered taxable person.

Statutory Provisions

Section 140(3) of CGST Act 2017 allows specified registered person to claim 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 30 June 2017. Statutory text of section 140(3) is reproduced as follows: –

(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012—Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, 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 subject to the following conditions, namely:––

i. such inputs or goods are used or intended to be used for making taxable supplies under this Act;

ii. the said registered person is eligible for input tax credit on such inputs under this Act;

iii. the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

iv. such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and

v. the supplier of services is not eligible for any abatement under this Act:

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.

It is evident from the above that credit in respect of eligible duties, where documents evidencing eligible duties are not available, is allowed subject to prescribed conditions. Rule 117(4) of CGST Rules 2017 prescribes the manner and conditions subject to which credit under proviso to section 140(3) is allowed. The statutory text of said rule is reproduced as follows: –

1(4) (a) (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) 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.

(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;

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

(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;

(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.

Analysis

It is evident from the above statutory provisions that credit of input tax on closing stock held as on 30 June 2017 is subject to following conditions: –

(i) The registered person should not be a manufacturer or supplier of service.

(ii) Such inputs are used or intended to be used for making taxable supplies under CGST Act

(iii )The registered person is eligible for ITC on such inputs under CGST Act

(iv) Such goods were not unconditionally exempt from duty of excise specified in the First Schedule to the Central Excise Tariff Act 1985 or were not nil rated

(v) Document for procurement of such goods is available with the registered person

(vi) Document should not be older than 12 months

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

(viii) The credit shall be allowed only after the GST applicable on supply of such goods has been paid.

(ix) The manner of taking credit in GST

(a) The registered person shall within 90 days (or as extended time limit) of the appointed day submit a duly signed application electronically in form GST TRAN – 1.

(b) The Form GST Tran-1 shall specify the details of stock held on appointed day

(c) The scheme shall be available for six tax periods from the appointed day

(d) Credit shall be allowed at following %: –

Rate of GST Credit %
CGST rate is @ 9% or more 60% of CGST applicable on such goods
CGST rate is less than @ 9% 40% of CGST applicable on such goods
IGST rate is @ 18% or more 30% of IGST applicable on such goods
IGST rate is less than @ 18% 20% of IGST applicable on such goods

(x) Registered person will submit 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.

It is evident from the above that to claim credit under proviso to section 140(3) of CGST Act, the one of the condition is that the stock of goods on which the credit is availed is so stored that it can be easily identified by the registered person. Now the question arises what this condition implies.

The various interpretations which may be drawn from the said condition are as follows: –

(i) The goods on which eligible registered person intends to claim credit are so stored that when the same are sold then registered person can know that these are sold out of old stock not new stock. It may imply that registered person should have mechanism to track sale of stock with corresponding purchase invoice.

(ii) The goods should be separately stored in the premises as on 30 June 2017 by eligible registered person and same should not be mixed with new stock. In this case, sale of tracking with purchases invoice is not required but stock as on 30 June 2017 should not be mixed with new stock.

(iii) The goods on which registered person intends to claim credit should be in the possession of registered taxable person. The registered person can mix the same with new stock. No mapping with purchase invoice is required at the time of sale. However, the registered person should able to know at the time of sale that these are sold out of old stock not new stock.

It has been observed that many small and medium organisation (wholesale trader, distributor or retailer) has claimed credit under proviso to section 140(3) of CGST Act 2017. They do not generally keep the tracking of stock with purchase invoice and also mix the same with new stock. They identify the fact that goods have been sold out of stock held as on 30 June 2017 with their experience rather than having an auto mechanism for the same. It might be possible that they have applied FIFO method to identify the fact of how much stock has been sold from stock held as on 30 June 2017.

For e.g. Mr. Ram, a registered taxable person, held stock of 500 pieces of Sarees as on 30 June 2017. He bought 5000 fresh pieces of Sarees during July 17 to Dec 17. As on 31 Dec 2017, 1000 pieces of Sarees is lying in his stock. Mr. Ram, neither has kept track of sale of particular piece of Saree with corresponding purchase invoice nor has kept separately the stock of as on 30 June 2017.

Now the question arises whether the credit under proviso to section 140(3) will be available to a registered person under above scenario. Whether it can be said that registered person has complied to condition that ‘The stock of the goods on which the credit is availed is so stored that it can be easily identified by the registered taxable person.

The time will tell how department interpret the said condition. If department interprets the said condition strictly then it will result into a lot of trouble to small and medium enterprise who has claimed credit under proviso to section 140(3) of CGST Act 2017 without keeping the track of sale of stock held as on 30 June 2017 by way of automatic mechanism.

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