GST Transition: How to Migrate Existing Input Credits?

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There is a lot of discussion around Goods and Services Tax (GST) and the impact that it may have on small and medium businesses. Large enterprises are already preparing themselves for the change that they may have to make in their current system to comply with the new GST regime. There are, however, certain doubts among small and medium enterprises (SMEs) on preparation required for a successful transition into the new tax regime.

Most of these doubts and concerns on requisite preparation were raised in a recent forum organized by the Institute of Chartered Accountants of India and have to do with how input credits will be transferred from one VAT or Service Tax to GST. In this article, we will see how SMEs must prepare themselves for the migration to the new tax structure from the current one.

Input Tax Credit

According to the model GST Law, a taxable person can accumulate credits of taxes paid and carry them forward in a return. With the introduction of the GST, the last set of credits will have to be transferred. To do this, you must furnish proof of his/her last return filed under the old regime. You will, therefore, need to make sure that all input taxes paid are included in it; by doing so, you will be claiming the credit of the same under the new regime.

For example, let’s consider July 1, 2017 as the appointed day for the GST rollout. The taxpayer must make sure that he/she has taken into account all the stock lying on June 30, 2017 and claim input credit during the filing of returns for the period ending June 30, 2017. The taxpayer, thus, must ensure that all such goods and services are eligible for such a credit under the new GST law.

Input Credit on Capital Goods

An input credit on capital goods that have been purchased in the previous regime will be allowed in the new regime as well. The provisions for transition as specified under the model GST Law make clear references to such an approval.

Credit of Excise Duty or Additional Customs Duty

This is probably the most critical provision of transition under GST. Under the present tax regime, a trader is not allowed a credit of excise duty or additional customs against excise. The tables, however, change in the new regime. Under the new tax regime, a supply of such goods will fall under GST but a credit of excise or additional custom duty will not be allowed. The immediate result of this would be the levying of GST on goods which have already been taxed under the existing tax procedure, without any credit availability. This may lead to cascading and distortion of prices.

This may also result in stock returns from dealers and traders to the manufacturers before the appointed day, and further making a new purchase subsequent to that day. Such situations may lead to panic among manufacturers and in turn affect their profits and returns.

Composition Scheme

Under the composition scheme of the new regime, the taxpayer must keep himself/herself in the know how about the implications that a migration from the old regime to the new regime may have.

Now, such a migration is expected to have a huge impact as the limit of the turnover under GST is Rs. 50 lakh, as against the existing Rs. 10 lakh.

It would, thus, be safe and fair to assume that many taxpayers will move from being regular taxpayers to paying taxes under the composition scheme.

The opposite of this would be wherein dealers, who are under the composition scheme, would be transformed into a being regular taxpayers. This may happen if the goods they are dealing in does not qualify under the exemption list of the new regime.

Situation 1: Availed CENVAT and Input VAT credit

Central Excise

For a manufacturer, he/she can carry forward the balance of the CENVAT credit that is available. This can be done prior to the date on which GST is implemented as input credit.

This ideally means that that closing balance of CENVAT credit must show in the last return filed by the taxpayer. Also that it should be eligible as input tax credit under the new GST.

As of now, a manufacturer (other than those in small scale industries whose turnover does not exceed Rs. 4 crore) should file their returns on a monthly basis in form ER-1, and SSI quarterly returns in form ER-3. Now, the amount of CENVAT carried forward in these forms on the last day, which means the day before GST is implemented, will be eligible for a carry forward as CGST input tax credit.

Let’s try and explain this with the help of an example. Let’s consider a company as XYZ Pvt Ltd. Now, XYZ Pvt Ltd is a two-wheeler manufacturer located in Bangalore and registered under the excise and Karnataka VAT. Now, say as of March 1, 2017, XYZ has a CENVAT closing balance of Rs 25,000. The question here is if this balance credit can be carried forward? Yes, it can be. This will be allowed if XYZ satisfies two aspects. One that its returns filed under ER-1 reflect the CENVAT balance. Secondly, the same is allowed as input tax credit in GST. For XYZ, this CENVAT will be CGST credit.

For an excise dealer, one is eligible for registration under the Central Excise if one trades in excisable goods. As of now, the excise duty that one pays will not be available as credit. If you are a first stage or a second stage dealer, the duty that is paid is added to the price of the product. Say if the product is sold to a manufacturer, the duty passed on is liable to be claimed as CENVAT credit by the manufacturer.

On the date of transition to GST, the excise paid with reference to closing stock held by you is allowed to be carried forward as CGST input tax credit.

VAT

A business entity registered under VAT needs to file its returns on a monthly and quarterly basis, depending on the state they work out of. The input VAT credit in the return forms is carried forward as SGST input tax credit.

Let’s again take XYZ Pvt Ltd as an example. Their VAT Form 100 shows credit/excess amount carried forward (as on 31st March, 2017) to be Rs 5,000. This implies that XYZ Pvt Ltd’s input VAT credit balance stands at Rs 5,000.

Now, can this be carried forward? The answer is yes, if XYZ Pvt Ltd fulfils some conditions. First that input VAT of Rs 5,000 must be shown in the returns and secondly GST approves of the same as input tax credit. If the above are satisfied, the input VAT will be carried forward as SGST credit.

Service Tax

As of today, a service provider is liable for registration if his/her aggregate value of taxable services crosses Rs. 10 lakh. Mentioned below are the type of service tax levied on various services:

1. Service tax at the rate of 14% is set off against service tax and excise liability.
2. Swachh Bharat cess at the rate of 0.5%
3. Krishi Kalyan Cess at the rate of 0.5%; set off against Krishi Kalyan Cess liability.

Now, an input tax credit is available on service tax and on Krishi kalyan cess. Such a credit is not available on Swachh Bharat cess.

A service provider needs to file his/her half yearly return in Form ST-3. The closing balance of service tax input credit will be carried forward as CGST input tax credit.

Again, taking XYZ Pvt Ltd as an example, let us assume that the company, under ST-3, has disclosed the CENVAT closing balance to be Rs 35,000. Yes, this can be carried forward by the firm if XYZ lets the CENVAT closing balance reflect in its return, and also makes sure that the same is eligible under GST.

Situation 2: Unavailed CENVAT credit and Input VAT on capital goods

As of now, under the Central Excise, CENVAT credit must be availed up to 50% in the current year. The remaining must be availed in the subsequent year. In the same way, VAT on purchase of capital goods is not fully available as input VAT immediately. This solely depends on the state VAT laws and also on the type of goods purchased. Such an input VAT can either be availed in various ways like instalments spread over various financial years or as credit after the state of commercial production, etc.

It is because of this prevalent restriction on availing CENVAT credit on capital goods that there are chances of some CENVAT and input VAT not having being availed on the date of transition to the new GST regime.

Let’s take XYZ Pvt Ltd as an example. Say, it purchased machinery on 2nd February, 2017 amounting to Rs 1,00,000 and paid an excise duty at the rate of 12.5% and VAT at the rate of 14.5%. The total comes up to Rs 1,28, 813.

As mentioned above, XYZ can avail CENVAT up to 50% in the current year, and rest in following year. And the state VAT provisions say that input VAT credit can be availed after the start of commercial production. Let’s assume that such a production was to start mid-year around June.

Given the conditions above, the following events follow:
1. 50% CENVAT comes to around Rs 6,250 for 2016-17
2. Rest of the amount (Rs 6,250) goes to the following year for the firm to avail
3. Since production starts mid-year, input VAT credit becomes eligible for 2017-18

Now, can all this be carried forward upon a transition to GST. Yes, it can be if the firm makes sure all necessary conditions are satisfied. One being that under the current regime, CENVAT and input VAT are accepted as input tax credit. Second being that the same is recognized by GST.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

1 COMMENT

  1. Vikramji

    Would dealers be able to take cenvat credit of Excise they are paying to manufacture against gst.

    Eg We are having a stock of 11475rs on a 30 june on which we have paid 1250 rs excise and 2250 rs cst so will we get the above 1475rs refund/ carry forward in gst

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