GST transitional provisions on credits key issues and challenges Sagar Shah 17 June 2017
Interpreting the Transition Provisions Obscurity is often caused not by unnecessary complication of language but by complication of thought - F.A.R.Bennion In interpreting the transition provisions, I am not guided by convenience, or simplicity or whether a provision denies any benefit or it provides for any additional benefit. To me the guiding principle for interpreting transition provision; amongst others is that a new legislative language must conform to an existing law and the fact that what may be a substantive provision under the new law is often dented under the transition provisions. Page 2 17 June 2017
Key transactions for action 01 Amount of eligible credit carried forward in the returns filed on the day immediately preceding the appointed date 02 For capital goods where partial CENVAT credit has been availed under the existing laws 03 CENVAT credit in relation to imported goods/ domestically procured goods (meant for trading) or manufactured goods lying in the depot not registered under Excise 04 Availment of credit held in stock/ semifinished/ finished goods 13 Tax deducted at source 05 Credit in relation to inputs/ input services in-transit 06 Input Service Distributor 07 Credit in case of person having centralised registration under existing law 08 Invoices in relation to input services whose ageing is more than 3 months 14 Issues not addressed 09 Inputs/ semi-finished/ finished goods sent for job-work 10 Purchase return and sales return 11 Price revision on/ after 1 July 2017 in pursuance of contract entered before 1 July 2017 12 Refund, Assessment, Adjudication, Appeals, Revision of return Page 3 17 June 2017
Amount of eligible CENVAT credit carried forward in the returns filed on the day immediately preceding the appointed date Page 4 17 June 2017
Legal provision [Section 140(1)] Person registered under existing regulations would be allowed to carry forward the credit as on the transition date as per the returns filed subject to: CENVAT/ VAT Credit should be eligible under the GST regime Returns for the last six months immediately preceding the appointed date should have been duly filed Credit should not be related to goods manufactured and cleared under exemption Should not be opting for composition scheme in the GST regime It is also provided that the credit attributable to the sales pertaining to which CST declarations (C, E, F, H, I, etc) are not received would not be allowed to be carried forward; and Transition rules also provide for filing of Form GST TRAN-1 within 90 days of the appointed day Page 5 17 June 2017
Key issues/ challenges Time limit for filing the TRAN 1 is 90 days can credit be availed in the first GST return by filing TRAN 1 before the due date. Can TRAN 1 be revised before 30 September 2017? How to identify expenses that are not eligible for credit in the GST regime and were eligible for credit in the GST regime from the closing balances of the credits For instance, repair for immovable property (like factory premises) capitalized in the books of accounts Details of CST declarations received for the period 1 April 2015 to 30 June 2017 need to be reported What about the declarations pending prior to 1 April 2015 (section vs rule) Time limit to issue C forms is three months which coincides with the due date of filing TRAN 1. Can the provisions allowing three months under the current law be ignored legally doctrine of impossible performance What is the meaning of credit attributable to CST declaration can it be said that only in cases where State laws provide one on one correlation or cases like provisional refund where such a restriction applies would only be covered by such a restriction CENVAT Credit on input services carried forward 90 days expiring in GST regime and payment not made. Whether reversal under Rule 4(7) of CENVAT Credit Rules, 2004 ( CCR ) or second proviso to Section 16 (d) would be required Page 6 17 June 2017
Capital goods where partial credit has been availed under the existing laws Page 7 17 June 2017
Legal provision [Section 140(2)] Registered person (other than person opting to pay tax under composition scheme) shall be entitled to avail unavailed CENVAT/ VAT credit in respect of capital goods subject to condition that credit on capital goods should be admissible under the existing laws as well as under GST Transition rules also provide for filing of Form GST TRAN-1 within 90 days of the appointed day Key Issues/ Challenges If domestic capital goods are not received within the premises on or before 30 June 2017 then the CENVAT/VAT credit in relation to such capital goods will not be available under the GST regime Can a service provider or manufacturer who has purchased capital goods within last 2 years as on the appointed date and whose services/goods were exempted can avail credit in GST regime if the services/goods are now taxable? Rule 6(4) of CCR can the benefit be extended. Page 8 17 June 2017
CENVAT credit in relation to imported goods/ domestically procured goods (meant for trading) or manufactured goods lying in the depot not registered under Excise Page 9 17 June 2017
Legal Provision Credit pertaining to the inputs held in stock or contained in the semi-finished goods or the credit pertaining to the finished goods held in stock to be allowed to the following persons: Not liable to be registered in the existing regime; [Section 140(3)] Engaged in manufacture of exempted goods or providing exempted services; [Section 140(4)] Engaged in manufacture of taxable as well as exempted goods or providing taxable as well as exempted services; [Section 140(4)] Works contract service provider availing benefit of notification 26/2012 ST (payment of tax on 25%/30% value); [Section 140(3)] First/second stage dealers, registered importer or depot of manufacturer; [Section 140(3)] Paying tax at a fixed rate or fix amount in lieu of tax payable [Section 140(6)] Availment of credit is subject to following conditions: Inputs or goods are used or intended to be used for making taxable supplies under GST Input tax credit should be admissible under GST Possession of relevant tax invoice or any other tax paying document evidencing payment of duty under existing law in respect of such inputs Such invoices were not issued prior to 12 months immediately preceding the appointed date The supplier of services should not be eligible for abatement under the GST regime Transition rules provide for reporting of stock as on the appointed date in GST TRAN 1 If duty paying documents not available, provision for Credit transfer document and presumptive credit discussed in detail later Page 10 17 June 2017
Presumptive Credit As per Transition rules, in case duty payment document is not available, presumptive credit of CENVAT on inputs would be available as below: Tax Rate (at the time of sale) Central tax below 9% Central tax @ 9% or more Integrated tax up to 18%/ more than 18% Presumptive Credit 40% of the central tax 60% of the central tax 20%/ 30% of integrated tax Conditions: Availment of credit is subject to passing on of the benefit of presumptive credit to the recipient Credit would be available only with respect to supplies made within six tax periods from the appointed date; a statement to be furnished in GST TRAN 2 at the end of six tax periods Such goods were not wholly exempt from Excise duty or were not nil rated (unconditional exemption) Document of procurement is available with the registered person Stock of goods of which credit is availed should be stored in a manner that it is easily identifiable Page 11 17 June 2017
Key issues/ challenges Provision provided only for carry forward of inputs; no provision for capital goods The definition of inputs and capital goods to be considered as per CENAT Credit Rules, 2004 or as defined in the GST regulations Furnishing of quantitative details and maintaining the same (for GST TRAN 2) could be cumbersome for certain assessees Presumptive credit available only for six tax periods (most likely six months) loss of credit on goods sold after this period Presumptive credit not available in respect of exempted goods how would any person other than the one buying directly from manufacturer determine that the goods were manufactured by exempted unit. If a manufacturer sells goods from his Pantnagar plant (exempt under Central excise) to a distributor who in turn sells it to a retailer can the retailer claim credit? Condition of storing goods in a manner that they are easily identifiable could be subject matter of interpretation and give rise to harassment/ litigation by the authorities Page 12 17 June 2017
Key issues/ challenges In case of goods like fertilizers, mobile phones, some food products, RMC where the duty was paid at 1% or 2% - can credit be availed by the distributor (buying from the manufacturer) for stock lying with him since this rate has been prescribed on the condition that no credit of the same would be eligible? In the above example if the distributor further sells to the dealer can the dealer claim presumptive credit of 40%/ 60% of CGST which would mean that the dealer may be eligible to a credit of an amount more than the Excise duty charged on the product (Example 40% of 6% CGST = 2.4% as against Excise duty of 1%) Does a pure works contractor paying Service tax on 40% of the contract value as per the current valuation rules, lose entire credit on goods lying in stock on the appointed date since the provisions of Section 140 (3) covers a builder/ developer and not a pure works contractor Can a builder take credit of the taxes contained in the WIP partly billed and partly not billed say out of 100 flats in the project, for 80 he has an agreement to sale and as on appointed date has already made the invoice for work done till that date. However 20 flats are unsold. Page 13 17 June 2017
Credit Transfer Document (Draft Rules under CCR) An assesse registered under Central excise regulations may issue a Credit Transfer Document ( CTD ) to evidence payment of duty to an assesse registered under CGST Act but was not registered under Central excise regulations subject to the following conditions: Value of goods is more than Rs 25,000 per piece and bears the brand name of manufacturer and identifiable as a distinct number (such as chasis/ engine number of car) Verificable records of clearance and duty payment relatable to each piece are maintained and are made available for verification by Central excise officer Manufacturer is satisfied that dealer to whom CTD is issued is in possession of the goods manufactured by him To be issued within 30 days of the appointed date Copies of all invoices relating to buying and selling from manufacturer through various intermediate dealers is maintained by dealers availing credit using CTDs At the time of selling the goods, dealer should mention the corresponding CTD number on the sales invoice Page 14 17 June 2017
Key issues/ challenges Condition of one to one correlation and value of Rs 25,000 could result in exclusion in large number of dealers Verifiable records of clearance and duty payment open to interpretation; could be clarified to provide for records maintained under Central excise regulations Can this be issued by manufacturer for each leg of the transaction Manufacturer to his depot to the dealer Responsibility cast on manufacturer till the last leg even in case of intermediate dealers. Page 15 17 June 2017
Credit in relation to inputs/ input services in-transit (received after the appointed date but in relation to which taxes were paid by supplier under existing law) Page 16 17 June 2017
Legal Provision [Section 140(5)] A registered person can avail credit in relation to inputs/ input services in-transit (received after the appointed date) but in relation to which taxes were paid by supplier under existing law subject to: Credit should be admissible under the existing laws as well as GST laws Tax has been paid by the supplier under the existing law; Invoice or duty/tax paying document shall be recorded in the books of accounts within the period of thirty days from the appointed day GST law provide for filing of statement containing invoice wise details of such goods and services received Page 17 17 June 2017
Key Issues Only inputs and input services covered and Capital Goods are not covered if Capital Goods are not received before appointed date and credit is not availed, then the credit in relation to such capital goods will not be available under the GST regime; Cases where taxes have been paid by the supplier have been covered, therefore: In case of imported goods, where duty is paid by the importer and not supplier, credit (of CVD and SACD) may not be available if not received and credit availed before appointed date Input services covered under full/partial reverse charge due date of payment of tax is 6 th of next month and credit is available after payment of tax. What happens to such Service tax credits Input services covered under full/partial reverse charge where tax is paid before appointed date on account of advance payment and the services are received after appointed date, then whether credit would be allowed? Mandatory requirement to have duty paying document Invoice under Rule 4A of Service Tax Rules. Page 18 17 June 2017
Credit with respect to Input Service Distributor Page 19 17 June 2017
Legal Provision [Section 140(7)] A registered person is entitled to avail credit with respect to invoices received by an ISD on or after 1 July 2017 subject to: Invoices must be received on or after 1 July 2017; Services to be received prior to appointed day. Key issues: Only credit which has been availed as on the 30 th June 2017 would be eligible to be distributed. This means that for credit received after 1 st July would be treated first in line with sec 140(1) and then it would need to be distributed if necessary. Page 20 17 June 2017
Credit in case of person having centralised registration under existing law Page 21 17 June 2017
Legal Provision [Section 140(8)] A registered person having centralised registration under existing law shall be entitled to take credit of the amount of CENVAT credit carried forward in the return, subject to: Return for such credit must be filed within three months from the appointed day; Such credit must be admissible under the GST provisions The credit from centralised registration can be transferred to any state registration (within same PAN) for which centralised registration is obtained Transition rules provide for filing of Form GST TRAN-1 within GSTIN of receivers of credit, within 90 days of the appointed day Key Issues Can a tax payer do the distribution selectively? For e.g. Out of total credit of say Rs. 5 crores, can he distribute this as per his credit- cash flow need to his 3 different units as 1 crore, 3.5 crore and 0.5 crore. Page 22 17 June 2017
Invoices in relation to input services whose ageing is more than three months Page 23 17 June 2017
Legal Provision - [Section 140(9)] A registered person shall be entitled to claim credit of input services reversed in existing regime due to non payment to service provider within three months, can be reclaimed subject to payment is made within three months from the appointed day. Key Action points: Pre GST Prepare a list of invoices in respect of which CENVAT credit has been reversed due to nonpayment of invoices within 3 months from the appointed date. There is an option of availment of such credit provided the payment is discharged upto 30 September 2017 Post GST No reporting in GST TRAN-1 Which GST return would credit be available and how? (which field in GSTR-2 would provide for this) Alternatively, if possible release payments to all vendors whose aging is more than 3 months (and whose credit had been reversed due to nonpayment) and avail the CENVAT credit in the last return filed before the appointed date Page 24 17 June 2017
Inputs/ semi-finished/ finished goods sent for job-work/ testing Page 25 17 June 2017
Legal Provision [Section 141] For inputs/semi-finished goods removed from place of registered person to a job worker under existing law, no tax shall be payable by such person if such goods are returned within a period of six months from the appointed day Six months can be further extended by two months by Commissioner Above would be also be applicable to: Excisable goods removed without payment of duty for testing or process not amounting to manufacture sec 140 (3) Goods sent on approval basis and have been rejected The goods can also be sent from the job worker premises directly to the customers Non-payment of taxes on return/ direct removal within six months is applicable only if principal and job worker, both report the dispatch wise quantitative details in GST TRAN 1 Page 26 17 June 2017
Key Issues If the goods sent for job-work are not received within 180 days from the appointed day then it would result in loss of credit and this would be recovered. What would happen in a case where the goods are sent to job-worker premises directly by the vendor and if such inputs are not received within the factory premises on or before 30 June 2017? Page 27 17 June 2017
Purchase return and sales return Page 28 17 June 2017
Legal Provision [Section 142(1)] For a B2C transaction - Refund of tax paid shall be available for goods returned by unregistered person after the appointed day on which duty has been paid under the existing law, subject to: The goods are removed under the existing law on or after 1 January 2017; Goods are returned within a period of six months from the appointed day; Goods are identifiable to the satisfaction of the proper officer. Permanent loss of taxes if not received within the said period. For a B2B transaction - Goods returned by a registered person shall be deemed to be a supply and GST would be applicable on such returns. Effectively means no time limit applies in such cases Page 29 17 June 2017
Price revision on/ after 1 July 2017 in pursuance of contract entered before 1 July 2017 Page 30 17 June 2017
Legal Provision [Section 142(2 & 3)] Price revision on or after 1 July 2017 in pursuance of contract entered before 1 July 2017: For goods supplied in existing regime, supplementary Invoices or Debit/Credit Notes to be issued within 30 days of agreeing for price increase or decrease on or after appointed day for a contract entered into prior to the appointed day Key Issues What if the price agreed in June 2017? Under the current Central Excise law, interest was paid by manufacturers considering the supplementary invoice issue in case of retrospective pricing. Would this be applicable under the current scenario? Page 31 17 June 2017
Credit of taxes paid both under Vat and Service Tax Page 32 17 June 2017
Legal Provision [142 (11)] No GST required to be paid to the extent: VAT was leviable on goods sec. 142 (11)(a) Service tax was leviable on servicessec. 142 (11)(b) However in cases where tax was paid on supply both under VAT and Service tax, then: Pay GST on supplies made after 1 st July 2017 and take credit of taxes paid earlier under VAT/ST to that extent - sec. 142 (11)(c) Key Issues What is the difference between sub section (a) & (b) vis a vis (c) What is the meaning of supply under sub clause (c) In case of an AMC where entire amount is received in advance ST is paid for full year and VAT for first quarter only - how would the position be tackled? Page 33 17 June 2017
Transition for Ongoing Real Estate Projects - Typical Maharashtra Scenario Scenario Whether agreement Registered or not Total Consideration Amount Received Invoice Raised VAT Liability discharged ST Liability discharged Supply under GST Opening SGST Opening CGST Scenario 1- Invoice raised and Amount received are same Registered prior to 31 May 2017 Registered on or after June 2017 1,00,00,000 50,00,000 50,00,000 1,00,000 2,25,000 50,00,000?? 1,00,00,000 50,00,000 50,00,000 50,000 2,25,000 50,00,000?? Scenario 2 Amount received is lesser than invoice raised Registered prior to 31 May 2017 Registered on or after June 2017 1,00,00,000 40,00,000 50,00,000 1,00,000 2,25,000 50,00,000?? 1,00,00,000 40,00,000 50,00,000 50,000 2,25,000 50,00,000?? Scenario 3 Amount received is higher than invoice raised Registered or not prior to appointed date 1,00,00,000 1,00,00,000 50,00,000 1,00,000 4,50,000 50,00,000?? Page 34 17 June 2017
Thank you