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Accumulated Credit Treatment after Migration to GST

The present structure of Indirect Taxes in India is based on three lists in Seventh Schedule to Constitution of India. The provisions were based on situation prevailing way back in 1935. Now, GST will be the new Avatar of tax for Twenty First Century. Barring unforeseen circumstances, GST will be implemented from July 1, 2017.

Every assessee registered under existing regime is afraid due to concerns over the treatment of accumulated credits lying in books of account. There are numerous doubts in minds of assessee's due to migration from current regime into GST. The transition to a new law is always difficult. It's the responsibility of the Government to make transition smooth and an easy affair and to ensure that unnecessary burden will not fall on shoulders of assessees during transition phase.

Section 140 of the Central GST Act, 2017 specifically provides for transitional provisions for input tax credit. This section clarifies treatment not only for transfer of credit shown in the last return before GST rollout but also credit of inputs and input services in transit and credit of stock.

The treatment of accumulated Cenvat Credit during transitional phase is summarized as under:

1.Transfer or Carry Forward of Closing balance of Cenvat credit
Section 140(1) and 140(2) provides that every registered dealer will be allowed to carry forward the credit shown in the returns furnished under the earlier laws by him for the period ending June 30, 2017 (It is assumed that GST will be implemented from July 1, 2017) Therefore, it is essential that all assesses should reflect all credits which they intend to avail either in ER-1 return, ST-3 return or any other VAT return.

But, credit shall not be allowed to be carried forward unless it is admissible as an input tax credit under existing laws. The proviso to Section 140(1) of CGST Act provides that credit will not be allowed if:
a. The said credit is not admissible as ITC under the GST Act, or

b. The taxable person has not furnished all required returns under existing regime for the period of 6 months immediately preceding the appointed date, or

c. The said credit related to goods manufactured and cleared under exemption notification

2. Treatment of Unavailed Credit on Capital Goods
Rule 4 of the CCR Rules, 2004 provides that maximum 50% of credit on taxes paid on Capital Goods will be availed by manufacturer or service provider in the year of receipt and balance in the subsequent financial year. Section 140(2) of the CGST Act provides that such balance portion of credit which was not claimed is allowed under GST. Thus, a registered dealer would be allowed to take credit of any unavailed Cenvat credit of capital goods.

But, Explanation to this section provides that GST Act will only allow availment of balance credit if such credit of capital goods was available under existing laws. Therefore, credit which was allowed but has not been taken under existing laws can be taken under GST.

3. Treatment of Credit on Input/WIP/Finished Goods held in Stock - Deemed Calculation
Section 140(3) provides that a registered person:
a. who was not liable to be registered under existing law, or
b. who was engaged in supplying exempted goods or services or both, or
c. First Stage Dealer or Second Stage Dealer or Importer or Depot then, he shall be entitled to claim credit of taxes in respect of inputs or WIP or finished goods held in stock.

But, such credit is allowed only if that person is allowed to claim credit for such stock in GST Act and he is in possession of invoice or other duty paying document.

However, a person other than a manufacturer or a supplier of services shall be allowed to take credit even if he is not in possession of invoice or duty paying document. The deemed credit will be available at the rate of 40% after payment of complete GST as per draft rules. This is mainly for traders who do not possess invoice to claim credit of excise duty.

For example - A trader has stock of Rs. 10 lakhs on July 1, 2017. In July, 2017 he sold goods worth 7 lakh. Suppose CGST is payable on the goods sold at Rs. 70,000. After payment of this tax of Rs.70000, he will get credit of 40% of 70,000, i.e., Rs. 28,000.

Thus, deemed credit is not available for manufacturer and supplier of services. It is, therefore, essential for them to always possess the duty paying documents.
Accumulated Credit Treatment after Migration to GST

4. Credit of Inputs or Input Services in transit
Section 140(5) provides that a registered person would be entitled to claim credit of taxes paid on input or input services which are received after GST rollout but taxes must be paid before GST rollout.

Moreover, the receipt must be accounted for within a period of 30 days of GST rollout. For example - If GST is implemented from July 1, 2017, then taxes must have been paid before June 30, 2017 and receipt must be recorded in books of accounts before July 30, 2017.

5. No provision for Credit of Capital Goods in Transit
GST Act does not make any provision for claiming credit of capital goods which will be in transit during GST Rollout. It is, therefore, advised that manufacturer should ensure that there be no capital goods in transit on June 30, 2017 assuming GST would be implemented from July 1, 2017.

6. Credit on switching over from composition scheme under existing regime
A registered taxable person who is a composition scheme taxpayer under existing laws, is entitled to take the Cenvat credit of eligible duties and taxes in respect of stock. However, he must satisfy these conditions:
a. Such goods held in stock are used for the purpose of making taxable supplies under the GST Act

b. He is not opting for composition scheme under GST.

c. He is eligible for input tax credit in respect of such inputs under GST.

d. He is person is in possession of invoices or other duty paying documents which should not be issued earlier than 12 months from GST Rollout.

Every effort has been made by the Government to ensure smooth and easy transition of an assessee into new GST regime. The provisions have been made to cover almost every possible scenario to make hassle free migration to GST regime and no loss will be incurred by any assessee due to GST implementation.

Banking Calculators GST

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