CA Achal Gupta

CA Achal Gupta

Transitional Arrangements for Input Tax Credit under CGST Act on unsold stocks by TRADERS 

Section 140(3) of Transitional Provisions of CSGT Act r/w Transition Rules

The government is doing all that it can to implement GST (Goods & Services Tax) with effect from July 1, 2017. As we move towards a new era of taxation, it becomes imperative to understand the plight of Input Tax Credit on unsold stocks held by us on the day immediately preceding the appointed day.

The CENVAT credit on inputs, capital goods and input services held in stock by manufacturers and / or service providers as carried forward in the return furnished by them under the existing law shall be allowed to be carried forward under GST in accordance with the transitional provisions. However, the GST law had to prescribe separate provisions for input tax credit in lieu of central levies (such as excise duty) on the closing unsold stock held by registered persons, especially those who are involved in the business of trading of goods (referred in the article as “traders”).

In case of stock of unsold goods held by traders, there can be two possibilities:

1. The trader / supplier / registered taxable person is in possession of an invoice or documents evidencing payment of duty in respect of inputs.

2. Where supplier is NOT in possession of an invoice or documents evidencing payment of duty in respect of inputs.

The below table enlists various aspects and differentiates between the two cases:

Particulars Where supplier is HAVING possession of an invoice or documents evidencing payment of duty in respect of inputs Where supplier is NOT in possession of an invoice or documents evidencing payment of duty in respect of inputs
[NOTIONAL CREDIT]
Relevant Provision under law Sec 140(3) of CGST Act Proviso to Sec 140(3) of CGST Act r/w Rule 4 of Transition Rules
Who CAN claim credit under this section? A registered person under GST:

a) who was not liable to be registered under the existing law (i,e, TRADER), or

b) who was engaged in the manufacture of exempted goods or provision of exempted services, or

c) 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

d) a first stage dealer or

e) a second stage dealer or

f) a registered importer or

g) a depot of a manufacturer

A registered person under GST, who was not liable to be registered under the existing law (i,e, TRADER)
Who CANNOT claim credit under this section? a) Manufacturer

b) Service Provider

a) Manufacturer, or

b) service provider, or

c) a registered person who was engaged in the manufacture of exempted goods or provision of exempted services, or

d) a registered person 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

e) a first stage dealer or

f) a second stage dealer or

g) a registered importer or

h) a depot of a manufacturer

Items for which credit CAN be taken Credit of eligible duties shall be allowed in respect of:

a) inputs held in stock and

b) inputs contained in semi-finished or finished goods held in stock on the appointed day.

Credit of eligible duties shall be allowed in respect of:

a) inputs held in stock (on which duty of central excise or, additional duties of customs, is LEVIABLE)

Items for which credit CANNOT be taken a) Input services,

b) capital goods

a) Inputs contained in semi-finished or finished goods held in stock on the appointed day,

b) input services

c) capital goods

Eligible duties for which credit CAN be taken “Eligible duties” means

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975; [CVD]

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975; [Spl. CVD]

(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;

(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;

(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001,

in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.

Not Applicable as credit is given on a Notional basis.
Duties for which credit CANNOT be taken a) Central Sales Tax (CST)

b) Service Tax

Not Applicable as credit is given on a Notional basis.
Eligible Credit Amount Since the supplier is in possession of documents evidencing payment of duty, he shall be allowed credit equivalent to 100% of the ACTUAL AMOUNT of duty or tax paid which is mentioned in the taxpaying document. In case the supply is made within SAME STATE, ie, in case of intra-state supply:
a) Credit shall be allowed at the rate of 60% of CGST applicable on supply of such goods if rate of CGST on that item is 9% or more,b) Credit shall be allowed at the rate of 40% of CGST applicable on supply of such goods if rate of CGST on that item is less than 9%,
In case the supply is made in ANOTHER STATE, ie, in case of inter-state supply:
a) Credit shall be allowed at the rate of 30% of IGST applicable on supply of such goods if rate of IGST on that item is 18% or more,b) Credit shall be allowed at the rate of 20% of CGST applicable on supply of such goods if rate of CGST on that item is less than 18%.
Conditions to avail the credit (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:

(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) of rule 1, 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.

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

(vi) the said taxable person shall PASS ON THE BENEFIT of such credit by way of REDUCED PRICES to the recipient.

Time period to make relevant supplies in order to claim the credit Not Applicable SIX tax periods, i.e., SIX MONTHS from appointed day, since in general returns are to be filed on a monthly basis by majority of registered persons.

Procedure for claiming credit:

a) Every registered person entitled to take credit of input tax under section 140 shall, within 90 daysof the appointed day, submit a declaration electronically in FORM GST TRAN-1, duly signed, on the Common Portal specifying therein, separately, the amount of input tax credit to which he is entitled under the provisions of Section 140.

b) The Commissioner may, on the recommendations of the Council, extend the period of ninety days by a further period not exceeding ninety days.

c) The declarant has to specify separately the details of stock held on the appointed day;

In a nutshell, where the supplier is in possession of documents evidencing payment of duty in respect of inputs, credit of 100% of eligible duties shall be allowed under GST and in cases where the supplier is not in possession of documents evidencing payment of duty in respect of inputs, credit shall be allowed, on a notional basis, at the rate of 60% of CGST in case of goods falling in cumulative GST tax bracket of 18% or above and at the rate of 40% of CGST in case of goods falling in cumulative GST tax bracket of less than 18%.

Whether GST will be implemented with effect from July 1, 2017, is a question of time, but as a proactive businessman, it becomes essential for us to understand and calculate the impact of GST on our business and take necessary steps well in time and be ready for the change.

Note: This article deals with the availment of input credit on unsold stocks in respect of existing central levies which shall now be subsumed under CGST. The availability of input tax credit on unsold stocks in respect of existing state levies (VAT) which shall now be subsumed under SGST is dealt in the respective state legislations. In general, input tax credit on unsold stocks shall be allowed in accordance with and to the extent it is mentioned in the documents evidencing payment of tax. However, notional credit is available in specific cases in some states, such as, in case of states offering tax on MRP scheme.)

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10 responses to “Transitional Arrangements for Input Tax Credit under CGST Act on unsold stocks by TRADERS”

  1. Gaurav Rawat says:

    Whether registered person (under GST), is a Manufacturer and trader (Not registered under Central excise), would be eligible for transaction credit as per the proviso of sec 140(3) in respect of inputs (documents evidencing payment of excise duty is not available) used purely for trading purpose?

  2. V N Chaudhary says:

    The purchasese documents do not reflect incidence of excise duty.Only CST has been charged.
    The goods are not exempted from duty.
    Whether Deemed excise duty benefit can be availed against stocks out of the above supply?
    Whether CST paid can be taken as input credit on stocks?

  3. K.N.Reddy says:

    if unsold good splayed by Tax exemption unit (new borne state Uthakhand)what are the prosier to claim ITC on above goods

  4. Vaibhav says:

    I had 2 queries:

    1) 1st stage dealer registered under VAT laws will be getting only 12 months cenvat credit for Excise paid on existing stock… However, for VAT can he get input VAT credit for purchases beyond 12 months… It may be inferred that he is covered u/s. 140(3) of CGST Act but 140(1) of SGST Act ?

    2) What about CST (Central Sales Tax) paid on existing stock which was been purchased from other state… Can manufacturer or dealer get its input credit?

    • SANJAY JAIN says:

      The scheme is to allow notional credit in absence of availability of original duty paying documents and for allowing notional credit, there is no condition for DUTY PAID. The condition is condition that tariff rate on such item was not NIL in the Central Excise Tariff or was not unconditional exempted.
      Mean to say where there was the possibility to payment of duty, trader is not required to trace duty payment status and credit shall be available on DEEMED BASIS. Even though purchase from SSI manufacturer who was enjoying Rs. 1.5 Cr exemption limit. The notional credit shall be admissible.

  5. ASHOK KUMAR KANUNGA says:

    Q.1. Supplier of assessee has not paid excise duty due to turnover is below threshold limit can asssessee ask ITC U/S 140(3) of CGST act on input held in stock appointed date – S.140(3)(2) use words PAID in all central act.

    Q.2. from which month assessee can take credit (Sec 140(3) (2) of CGST.? – Sec speaks such supply has been paid and invoice raised under the GST regime – sale was made in July 2017 tax was paid on 20th august 2017Means credit allow in the GSTR-3 of August.

    Ph – 080-22255531/42154492

    • SANJAY JAIN says:

      The scheme is to allow notional credit in absence of availability of original duty paying documents and for allowing notional credit, there is no condition for DUTY PAID. The condition is condition that tariff rate on such item was not NIL in the Central Excise Tariff or was not unconditional exempted.
      Mean to say where there was the possibility to payment of duty, trader is not required to trace duty payment status and credit shall be available on DEEMED BASIS. Even though purchase from SSI manufacturer who was enjoying Rs. 1.5 Cr exemption limit. The notional credit shall be admissible.

  6. achal2301 says:

    This condition is in sync with the anti profiteering provisions implanted under section 171 of the CGST Act which clearly stated government’s intentions to ensure that the credit is passed on to the consumer by way of reduced prices. For this, the lawmakers propose to setup an Authority to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

  7. PAWAN KUMAR AGARWAL says:

    Trader needs to pass on the credit to the consumer
    which businessmen does not know and how they will probe it

    • achal2301 says:

      This condition is in sync with the anti profiteering provisions implanted under section 171 of the CGST Act which clearly stated government’s intentions to ensure that the credit is passed on to the consumer by way of reduced prices. For this, the lawmakers propose to setup an Authority to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

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