Transition from one tax regime to another is always a challenging one. However the transition of multiple state taxes, central tax to a unified and biggest indirect tax reform GST has been really painstaking.
Provisions of GST Law: The CGST/SGST/UGST Act have detailed provisions regarding the Transitional Credit available to the dealer to ease the Transition to GST. Sec. 139 to Sec. 142 of CGST Act along with Rule 117 to 121 of CGST rules have detailed provisions regarding transition which includes;
a) Migration of erstwhile dealer to GST
b) Transitional credit of CENVAT/VAT Carried forward from the last return filed under erstwhile tax regime
c) Transitional Credit of Un availed CENVAT Credit in respect of Capital Goods
d) Transitional 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.
e) Transitional Credit of inputs in case of registered dealers other than manufacturers or service providers who are not in possession of duty paid documents.
f) Transitional credit to those dealers who were engaged in manufacture of taxable as well as exempted goods under the erstwhile regime but are liable to tax under GST.
g) Transitional credit in case of Goods/Service in transit on the appointed day.
h) Transitional credit of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day by a Composition dealer
i) Transitional Credit to an Input Service Distributor.
j) Transitional Credit to a registered person having Centralised Registration.
k) Reclaiming of CENVAT Credit reversed earlier due to non-payment of consideration.
l) Transitional Credit to Job Workers
m) Transitional Provisional for Goods return in GST regime
n) Transitional Provisions in case of revision of Contract price post GST implementation
o) Transitional Provisions in relation to goods sent on approval basis in the erstwhile regime.
p) Transitional Provisions in respect to those dealers to whom State VAT and Service tax both are applicable (Builders, Works Contractor, Hotelier etc.)
Challenges in Filing of GST Transitional Forms:
Trans – 1, Trans – 2 and Trans – 3 are the three most important forms, apart from others, for claiming transitional benefit under GST. However it has not been an easy task of filing of Transitional Credit as it faced numerous issues few of which are listed here:
a) Legal Issues: The stringent conditions laid down in the law for availing transitional credit has made it difficult for the assesse to take transitional benefit in a lenient and friendly manner. The non-availability of benefit to the goods manufactured under exemption notification, invoices not earlier than twelve months, filing of all returns for a period of last six months under the erstwhile law, issues in defining eligible duties and taxes etc. have resulted into uncertainties and wrong claim of credit by many. Non availability of credits of Krishi Kalyan Cess, Education cess, credit of VAT, PLA balances as Transitional Credit shall surely lead to litigations.
b) Technical Issues: The Portal has never been user friendly and the same has created multiple technical issues while filing of Transitional forms. The time and again extension of filing of Trans 1, notifying the last date for filing Trans 2 have unnecessarily burdened the dealers. Many dealer have yet not got the transitional benefit credited in their account due to technical glitches and GSTN is not ready to accept the blame.
c) Lack of Understanding of Provisions: It has been seen that there was a general lack of understanding of Transitional Provisions not only by dealers but also by tax consultants at large which has led into wrong claims of transitional credits. There are many instances of wrong credit availed like in case of builders, contractors etc., wrong claim of deemed credit in case of manufacturers, service providers etc., availing disputed credits or blocked credit u/s 17(5) of CGST Act which has been prohibited and many more such wrong claims have been made.
Verification of Transitional Credit Claims:
In order to check “frivolous and fraudulent” tax credit claims by businesses, the CBEC has decided to verify demands of top 50,000 tax payers claiming maximum GST transitional credit, starting with those where the quantum exceeds Rs 25 lakh. A detailed Guidance Note has been issued to aid and assist the field formation in verification of Transitional Credit.
Various factors have been identified for verification of the Transitional Credit however the major principles identified by CBEC are as follows:
a) Only such CENVAT Credit can be taken as credit of CGST for which explicit legal authority exist in the provisions of the law. There can be no transition of any kind of credit by reading policy intention into the law.
b) Same CENVAT Credit cannot be availed as transitional credit twice like claiming in Transitional forms and also in 3B or claimed in erstwhile period and again in transitional forms etc.
c) Verification for the correctness of the claim by dealers where there is a steep hike in credit as compared to sept – 16 to Jun -17 data.
Modus Operandi by Directorate General of Audit in case of Verification of Transitional Credit by Construction Industry:
The letter issued by Directorate General of Audit for verification of Transitional Credit by Construction industry raising contention on the claim of inputs contained in the building under development makes the intention of the government very clear that it is not going to allow Transitional claim an easy cake walk. The difference of opinion in interpreting the law will go a long way till Courts interfere and give their ruling on such litigating issues.
Non availability of Transitional Credit as Refund: The Circular No. 37/11/2018 has opined that the Transitional Credit shall not be considered as “Net ITC” and hence shall not be part of calculation of refund amount for exporters who are making exports without payment of IGST under LUT or Bond.
Recent Judicial Pronouncements on Transitional Credit:
Re-opening of Trans 1: The Rajasthan High Court in case of Arihant Superstructure Ltd. has directed the Commissioner CGST to reopen the portal or accept manually the Trans 1 of the petitioner.
The Allahabad High Court in KTL (P) Ltd. vs. Union of India has directed the commissioner to reopen the portal within two weeks from the date of order or accept the application manually and pass order accordingly.
The Bombay High Court in Padmavati Enterprise, Abicor and Binzel Technoweld Pvt. Ltd. Vs The Union of India & Another, has directed the Commissioner to provisionally entertain the GST Trans 1 and other returns of the petitioner either by way of opening the portal or manually.
Govt. has submitted before the Delhi HC in the matter of Vee Gee auto Components P. Ltd. that they will set up IT grievance redressal committee and appoint nodal officers to address transitional issues relating to Trans 1 resulting into loss of ITC to the assesses.
Reduction of Transitional claim to the extent of non-availability of Declaration forms : While admitting a petition challenging the provisions of Gujarat Goods and Services Tax (GGST) Act, the Gujarat High Court has issued notices to GST Council, GSTN, State Government and Central Government and observed that the transitional credit is vested right which cannot be denied by the Government. The petitioners, M/s Willowood Chemicals Pvt. Ltd submitted that when a firm is already liable to pay differential tax, interest and penalty for non- submission of various forms, it is “arbitrary and confiscatory” to not to carry forward input tax credit for not submitting forms.
Carry forward of unutilised amount of Krishi Kalyan Cess, Education Cess, SHE into GST:
The Delhi High Court in case of Cellular Operators Association of India & Others Vs UOI held that the manufacturers and service providers are entitled to avail and utilise KKC, EC & SHEC against the respective liability however the balances of same are not eligible to be carried forward in GST regime.
Constitutional Validity of Sec. 140(3)(iv) of CGST Act allowing credit with 1 year limit: The Bombay High Court refused to strike down 1 year time limit for transitional claim availment holding that for smooth transition from old indirect tax regime to GST regime, some arrangements were required to be made and conditions with respect thereto be imposed & 1 year limit has clear nexus with objective sought to be achieved by GST legislation and therefore cannot be struck down.
The Court has held that Transitional Credit is a vested right and can’t be denied. It has been observed that many dealers were unable to claim transitional credit because of numerous reasons. It is to be seen what modus operandi does the government comes out with to entertain the claim of Transitional credit which has not been filed and also it needs to be seen who all get the benefit of such initiative whether all assesse in general or with some conditions.
Dealers who have not claimed Transitional Credit: Many dealers who were not able to file Transitional forms due to technical glitches or have filed the required forms but have not got the credits in the electronic ledger are the most effected ones. Such dealers would have approached the GST help desk to get their issues resolved. Those dealers who didn’t get support from GST helpdesk need to explore other avenues like communicating to the Jurisdictional Commissioner with the facts and the reasons for not getting the credit. At least by bringing it to the knowledge of the department, the dealer has fair chance of getting back the lost transitional credit.
Dealer who have wrongly claimed Transitional Credit: There would be many dealers who would have due to lack of understanding of Transitional provisions or interpreting the law in an inappropriate way may have claimed wrong transitional credits which were not available to them. In such situation, the dealer should bring such wrong transitional claim to the attention of the department well in advance along with its version of interpretation of the law and give an undertaking not to utilise such wrongly claimed transitional credit. It may help them to claim bonafide and ultimately protect them from interest and penal provisions
Dealer who have short claimed Transitional Credit: Transitional Credit can be claimed through transitional forms only. It would be very difficult now to get back the short claimed transitional credit however the assesse would write to the jurisdictional commissioner and may bring the facts in its knowledge. With many courts directing to reopen Trans 1, the govt. may design a mechanism to entertain the Transitional credit not claimed/short claimed.
Gear up for Verification of Transitional Credit: With the Govt. making it clear that top 50000 claims of Transitional Credit would be verified, the dealer need to gear up for verification of Transitional Credit. The documents like invoice copies, previous period returns, status of pending declaration forms, documentary evidence of supply, evidence of passing on transitional benefit etc need to be kept ready for scrutiny & verification.