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.

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7 Comments

  1. Bhadresh says:

    I am registered dealer. My input tax credit rate is higher than my output tax rate. I wish to file a refund claim for the accumulated credit in my credit ledger. i have given an example as follows :-

    Suppose I have taken 1,00,000 ITC + 1,00,000 transitional credit during the particular period. I have paid 1,00,000 GST during the same period.

    that mean i have utilized the transitional credit for payment of my GST liability. My ITC will remain Balance in my Credit ledger. And Refund of the Balance ITC is allowed.

    How can I explain my above situation in my Refund Claim.

  2. V S Viswanathan says:

    Once the carry forward credit is merged into ITC kitty under respective ITC category along with the ITC on post GST supply, it becomes common ITC kitty. It is not possible and feasible to analyse the credit as to transitional credit or post GST credit. The direction from the CBEC is debatable and may lead to litigation.

    1. Kasi Viswanathan says:

      Thanks for read and comment. Once we accept that it is carried forward credit, will it be just to state that these credits are availed during the relevant period?

  3. Abhaydesai says:

    Sir,
    If we conclude that “transitional credit” is not ITC, we will never be able to utilize the same. This is because Sec. 49(5) which prescribes the manner for utilization refers to balance of “ITC” in the electronic credit ledger. Going by your strict interpretation of “ITC” one will never be able to utilize the transitional credit.

    One cannot treat transitional credit as ITC when it comes to “utilization” and not as ITC when it comes to “refund”. Such discriminatory treatment is nowhere specified in the law.

    Reference to Sec. 142(4) also seems to be misplaced. This is because it talks about refund of “duty or tax paid on export of goods or services”. This will not cover cases where person exports without payment and claims refund of accumulated ITC.

    Reliance on Sec. 142(11)(c) also will not support your conclusion. It provides for claiming credit of VAT or ST paid. Such credit will be in the form of SGST or CGST simply because without that one will not be able to utilize the same.

    It may also be noted that one of the condition for claiming transitional credit u/s 140(1) or 140(3) is that such amount is admissible as “ITC”. If one holds a view that such amount is not “ITC”, one will never be able to satisfy the referred condition.

    1. Kasi Viswanathan says:

      Thanks for the read and detailed comment.

      Kindly refer the conclusion: transitional credit will be separate genre of credit and merges with GST input tax credit for limited purpose.

      Allowing transitional credit for carry forward into ITC and blocking it’s utilization under section 49(5) will not serve the purpose.It will form part of pool of input tax credit but will always have a separate identity.

      Section 142(4) talks about duties and taxes paid under existing law in respect of goods of services exported. I appreciate your view that ‘in respect of ‘ is to be read as ‘on’. Even if it is read as ‘on’, result is if any duties/taxes are paid on the goods during pre-gst regime and held in closing stock on appointed date, we would have carried forward the transitional credit and now we are exporting the goods without payment of integrated tax and attempting to claim this duties as refund under GST by including it in Net ITC, which is clearly nothing but claim of refund of duties/taxes paid on goods – exported after the appointed date under GST law.

      Section 142(11)(c) states that we take credit of vat or service tax, which shows that transitional credit comes into ITC pool with their respective labels, thereby contention that section 140 states entitled to take, thereby we take credit a fresh into GST needs a review.

      Section 140 (1) & 140 (3) casts an obligation to check, whether they are in other parameters eligible as input tax credit
      and it does not confer – perfect input tax credit status for transitional credits, as these amounts are not central tax/state tax charged, which is basic requirement under section 2(62).

      These transitional credits are also ITC under GST, but they have their separate identity. Treating them as normal ITC for all purposes will have unintended consequences.

      1. Abhaydesai says:

        Appreciate your views. Only submission with regard to unintended consequences (e.g. applicability of Rule 43) is that Rule 43 comes into play only if Sec. 17(2) is triggered. Sec. 17(2) gets triggered only if ITC is “attributable” to exempt supplies. We are concerned with a situation where ITC in respect of “inputs” has been c/f. Hence if such inputs have already been used up before 01.07.2017, same cannot be said to be “attributable” to exempt supplies made on or after 01.07.2017 and hence Rule 43 will not be applicable.

        1. Kasi Viswanathan says:

          Thanks for further response and constructive argument.

          It is true that Rule 42 & Rule 43 both come into play, if there is involvement of exempt supplies.

          Interesting issue “attributable” vs “availed” .

          In hindsight, on an already used up input during pre-gst era, refund claim will be made stating that it has been availed during GST period. Highly questionable.

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