Is Transitional Credit – Refundable Under GST?

There is general doubt whether para 8 of Circular No. 37/11/2018-GST dated 15.03.2018 on Refund of transitional credit is right?

Relevant portion of the circular:

“ Refund of unutilized input tax credit is allowed in two scenarios mentioned in sub-section (3) of section 54 of the CGST Act. These two scenarios are zero rated supplies made without payment of tax and inverted tax structure. In sub-rule (4) and (5) of rule 89 of the CGST Rules, the amount of refund under these scenarios is to be calculated using the formulae given in the said sub-rules.The formulae use the phrase ‘Net ITC’ and defines the same as “input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both”. It is clarified that as the transitional credit pertains to duties and taxes paid under the existing laws viz., under Central Excise Act, 1944 and Chapter V of the Finance Act, 1994, the same cannot be said to have been availed during the relevant period and thus, cannot be treated as part of ‘Net ITC’. ”

Grounds advanced for inclusion of transitional credit in Net ITC for determination of Refund amount:

There is view expressed in recent article by a learned friend that in terms of section 140 (entitled to take), taxpayer avails the transitional credit afresh under GST and thereby it is permissible to include them in Net ITC and the IT processes in place also supports this contention.

The issue emerges as section 140 states the taxpayers are entitled to take credit and they have not stated that amounts are carried forward. Interestingly, in the forms GST TRAN -1 & GST TRAN-2 it is consistently said that credits are “carried forward” to electronic credit ledger, while not only the Act but the Rules also didn’t expressly state so. To add to further confusion, the forms also state that amount is credited to electronic credit ledger as ‘central tax’/’state tax’, as these are forms – not much importance could be attached on these to understand the provision.

Viewing it from the point of merchant exporter (say a exporter in seasonal exports business), the plea appears just & reasonable. For instance, M/s. GST & Co. procures goods during pre-GST era and exports it during GST regime following section 16(3)(a) of IGST Act, 2017 under LUT. He claims refund of unutilized input tax credit, then it is fair atleast to the extent of stock carried forward and exported under GST regime, he must be permitted the benefit.

However, issue is bound by provisions of law.

Transitional credit cannot be claimed under section 16(3)

Apart from CBEC’s reasoning that these are duties and taxes from existing law being carried forward and therefore not availed during the relevant period.

Following two points are good reason to believe that transitional credit cannot be included in Net ITC for determination of tax under Rule 89:

♣ Firstly, Rule 89(4) grants refund of input tax credit and transitional credit does not meet the definition of input tax credit as explained below:

(63) “input tax credit” means the credit of input tax;  

“(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes —

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy”

On a closer reading of above definitions, it will be apparent that transitional credit does not fit under section 2(62) and therefore in strict terms cannot be construed as an input tax credit.  It is undoubtedly not covered by inclusive portion of definition of input tax and it is also not covered by means portion, as in no stretch of imagination it can be said that these are central taxes or state taxes charged.

♣ Secondly, section 142(4) reproduced below,

“ Every claim for refund filed after the appointed day for refund of any duty or tax paid under existing law in respect of the goods or services exported before or after the appointed day, shall be disposed of in accordance with the provisions of the existing law:”

states that duty or tax paid under existing law in respect of goods or services exported even after the appointed day is governed by existing law. Though there is no apparent provision to claim refund under existing law for goods exported after appointed day, but this provision clearly indicates that refund, if any, of duties and taxes paid in relation to export is under the purview of existing law. With application of rule of construction ‘expressio unius est exclusio alterius’ i.e. the expression of one thing is the exclusion of the other, it can be said that taxpayer is barred from claiming refund of said duties and taxes under GST regime.

Moreover, this proposition of treating transitional credit as input tax credit will lead to unintended consequences, such as testing of transitional credit under Rule 42 for determination of ITC. Applying the analogy, credit carried forward under section 140(2) would then become subject to Rule 43, which will be even more complicated.

The phrase ‘entitled to take’ is consistently employed throughout the Act right from section 16 – through section 18 to section 140, 143.  While in section 16 & section 18 they discuss about taking credit of input tax under GST, under section they mean the credit of respective duties and taxes and section 142(11)(c) is testimony to this,

“where tax was paid on any supply both under the Value Added Tax Act and under Chapter V of the Finance Act, 1994, tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law” 

In view of above, transitional credit will be separate genre of credit and merges with GST input tax credit for limited purpose and will continue to hold out its identity in other cases such as refund claim, determination of ITC etc.