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Migrating to GST: An Overview of Transitional Provisions

Migrating to GST: An Overview of Transitional Provisions

As we move on to the GST regime, transitional provisions play an extremely critical role. The transitional provisions are codified in Section 141 to Section 162E under Chapter XXV of Goods and Service Tax Act, 2016 as well as Section 31 under Chapter X of Integrated Goods and Services Tax Act, 2016.

Important topics include:

  • Registration
  • Switching from Composition scheme to Normal Scheme or vice versa
  • Treatment of CENVAT/Input tax credit (ITC) balance
  • Continuous supply of goods and services
  • Price revisions in GST regime in pursuance of a contract entered before GST enactment
  • Movement of goods on or after enactment of GST Law
  • Claims or proceedings pending under earlier laws

We have attempted to provide an understandable overview of the transitional provisions in the coming sections. Have a look:

1. Registration

A.  Existing registered taxpayers (Section 142)

  • No automatic registration under GST framework.
  • Issue of registration certificate under GST Law on provisional basis valid for a period of 6 months
  • Final certificate to be granted on the submission of requisite information within specified time
  • Failure to submit information may lead to cancellation of provisional RC.
  • No final certificate of registration shall be issued, if an application has been made by the existing taxpayer submitting the fact of their non-taxing supply under the pool of GST ambit which makes them non-liable to take registration.

B. Manufacturer claiming SSI exemption under earlier laws

  • Mandatory registration under GST based on turnover limit

C. Trader having turnover below the threshold under VAT making sales through e-commerce operator under earlier laws

  • Mandatory registration under GST irrespective of turnover limit.

2. Switching from Composition scheme to Normal Scheme or vice versa

A. Opting OUT Composition scheme in GST regime

Refer the section “Credit of eligible duties and taxes in respect of inputs held in stock

B. Opting IN composition scheme in GST regime

The concerned registered person shall have to pay an amount equivalent to the credit of input tax on inputs held in stock on the day immediately preceding the date of switchover.

The amount can be paid either through the electronic credit ledger or the electronic cash ledger. In case, the payment is made through the electronic credit ledger, excess ITC balance lying if any, will lapse. (Section 147)

3. Treatment of CENVAT/Input tax credit (ITC) balance

A. Treatment of availed CENVAT credit /ITC

CENVAT or ITC carried forward in the last return under earlier law will be available to the registered taxable person in GST and will be credited to his electronic credit ledger. (Section 143)

Such availed credit is available in GST only when ITC on such goods were admissible under the earlier law and is also admissible in GST.

B. Treatment of unavailed CENVAT credit

Unavailed portion of CENVAT credit on capital goods, not carried forward in last return under earlier law by virtue of covenant can be taken after introduction of GST.

To illustrate, a registered taxable person say, purchases capital goods in the last quarter of 2016-17. Though the invoice is received within 31st March but the capital goods are received on 5th April, 2017 (i.e. in GST regime). Such a person will get full credit of CENVAT in 2017-18 under GST (Explanation to section 144 (1))

Such unavailed credit is available in GST only when ITC on such goods were admissible under the earlier law and is also admissible in GST.

For example if VAT credit was not available on items ‘A’ & ‘B’ as capital goods in the earlier law but now covered under GST, ITC cannot be claimed under GST. (Proviso to section 144(1))

3. ITC on services received prior to date of GST enactment by Input service distributor (ISD) can be distributed in GST regime. This is irrespective of whether the invoice(s) relating to such services is received on or after the date of GST enactment (Section 162). Remember date of receipt is important.

4. Recovery relating to ITC wrongfully enjoyed under earlier law to be done under GST only. (Section 143 to 146)

Some points to ponder:

a) The last return criteria need clarity by government. For e.g. assuming April 1, 2017 being the enactment date of GST, under service tax, the last return filed would pertain to half year April to Sep and credit will be allowed to be carried forward. But what about second half year return credit?

b) A service provider engaged in providing services from multiple locations and registered as centralized registration may have credit balance. Such person may require taking state-wise registration under Goods and Service Tax (GST). How shall the credit balance on migration be apportioned among various units of assessees in different state? Whether option would be allowed to set off the credit balance against liability arising in any of the states?

4. Credit of eligible duties and taxes in respect of inputs held in stock

The credit of eligible ‘duties and taxes’ in respect of:

a) Inputs held in stock,

b) Inputs contained in semi-finished goods in stock or

c) Inputs contained in finished goods in stock

on the date of enactment, shall also be available to below mentioned three categories of persons subject to the compliance of subsequently mentioned conditions:

1) Person who was not liable to be registered under the earlier law but falls under the charging section of proposed GST (Section 145)

2) Person, who was engaged in the manufacture of exempted goods under the earlier law but in GST, falls under the taxable supply of goods. (Section 145)

3) Person who has opted for composition scheme in the earlier law but registered as normal taxable person in the GST regime. (Section 146)

Now, below mentioned conditions is sine qua non for this registered taxable person under GST to take credit, in their electronic credit ledger, of these eligible ‘duties and taxes’ on inputs-goods held in opening stock:

  • Such inputs and / or goods are used or intended to be used for making taxable supplies under GST.
  • CENVAT/ITC credit was otherwise available under the earlier law.
  • Input tax credit admissible under GST
  • Invoice and/or other prescribed documents evidencing payment of duty / tax under the earlier law in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the date of enactment must be in possession
  • Such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the GST enactment date.

Suggestion:

It is suggested to keep the inventory balance at lower levels on migration date. This is because a VAT dealer may not be entitled to CENVAT credit under existing law. If inventory is held on migration date and sold post GST, liability of GST would arise without eligibility of corresponding excise credits. If same goods are purchased post GST, credit of GST would be available to set off against output supply.

5. Long term construction/works contracts

  • Goods or services supplied in GST regime, in pursuance of contract entered under earlier law shall be liable to GST (Section 159)
  • Where supplier has made any sale of goods in respect of which tax was required to be deducted at source under earlier law and also issued the invoice before enactment of GST law, no tax shall be deducted u/s 37 where payment to the supplier is made on or after the enactment of GST law. (Section 162E)

6. Continuous supply of goods and services

  • If consideration for a particular supply of services was received under the earlier law and tax on it was paid, no tax shall be payable on supply of goods/services on or after the enactment date (Section 160).
  • If the supply of goods/services was made under the earlier law but a part of the consideration (say the retention money) is received in GST regime, no tax is payable. (Section 161)

7. Price revisions in GST regime in pursuance of a contract entered before GST enactment

  • The taxable person may issue the debit/credit note(s) or a supplementary invoice within 30 days of the price revision.
  • In case price is revised upwards, tax has to be paid on the same as it will be classified as “Deemed Sales”.
  • In case where the price is revised downwards the taxable person shall be allowed to reduce his tax liability only if the recipient of the invoice or credit note has reduced his ITC corresponding to such reduction of tax liability (Section 153)

8. Movement of goods on or after enactment of GST Law

A. Exempted Goods returned to place of business after enactment of GST

No GST payable if:

  • removal/sale of goods happened within a period of six months preceding date of enactment;
  • Return is done within a period of six months from the date of enactment and
  • such goods are identifiable to the satisfaction of the proper officer

GST shall be payable by the person returning the goods if the said goods are liable to tax under GST and are returned after a period of six months from the enactment date. (Section 148)

B. Duty paid goods returned to place of business after enactment of GST

No GST payable if:

  • removal/sale of goods happened within a period of six months preceding date of enactment;
  • Return is done within a period of six months from the date of enactment and
  • such goods are identifiable to the satisfaction of the proper officer

GST shall be payable by the taxable person returning the goods if the said goods are liable to tax under GST and are returned after a period of six months from the enactment date.

Credit of duty/tax paid earlier at the time of removal/sale available for taxable person who receives such goods within a period of six months. (Section 149)

C. Inputs/semi-finished goods removed for job work and returned on or after date of enactment

No GST payable if:

  • Inputs/ semi-finished goods are sent to the job worker in accordance with the provisions of the earlier law before the enactment date.
  • The job worker returns the same within six months from the enactment date (or extended period of 02 months).
  • Both the manufacturer and the job worker declare the details of inputs held in stock by the job worker on the enactment date in the prescribed form.

Tax would be payable by the job worker if goods not returned within 6 months after date.  Further, the manufacturer will also be liable to pay tax on expiry of the specified time limit. (Section 150/151)

D. Finished goods removed from a factory for carrying out certain processes are returned after date of enactment

No tax will be payable in GST by the manufacturer or by the Job worker if:

  • Processing does not amount to manufacture
  • Goods are returned within 6 months from the enactment date (or extended period of 02 months)

Also, a manufacturer can as per the provisions of the earlier law transfer the said goods to the premises of any registered taxable person on payment of tax or without payment of tax for exports within 6 months or extended period from the GST enactment date. (Section 152)

E. Goods sent on approval basis returned on or after date of enactment

GST is payable on such goods by the returning person if:

  • Such goods are liable to tax in GST and
  • The person who rejected or not approved the goods returns it after 6 months (may be extended by 2 months) from the date of enactment.
  • This provision is applicable to SGST law only (Section 162D)

Note

The six months as mentioned above is extendable by 2 months. However this extension is not automatic. It shall be extended by the competent authority only on sufficient cause being shown.

F. Import of services or inter-state supply of goods and/or services made on or after the GST enactment date

GST is payable on such goods regardless of whether the transactions for such import of services or inter-state supply had been initiated (i.e. receipt of invoice in part or full) before the GST enactment.

However if tax has been paid under the earlier law in full, no GST is payable. (Section 31 of IGST)

9. Goods lying with agents on the date of enactment

In case, goods (including capital goods) belonging to the principal are lying with the agents on the day of enactment, the agent can take ITC on such goods on fulfillment of the following conditions:-

  • The agent is a registered taxable person in GST;
  • Both the principal and the agents declare the details of stock lying with the agents on the date immediately preceding the date of enactment;
  • The invoices for such goods had been issued not earlier than 12 months immediately preceding the date of enactment;
  • The principal has either reversed or not availed of the ITC in respect of such goods.

This provision is applicable to SGST law only (Section 162A and section 162 B)

10. Treatment of branch transfers

  • Any amount of input tax credit reversed prior to the GST enactment shall not be admissible as ITC under GST.
  • This provision is applicable to SGST law only (Section 162C)

11. Refund or recovery of amount arising from revision of return(s) furnished under the earlier law

  • Refund if any arising on revision shall be made in accordance with the provisions of the earlier law. (Section 158)
  • Recovery, if any, to be made on pursuance of such revision shall be made as an arrear of tax under GST.
  • Recovered amount shall not be admissible as ITC under GST.

12. Claims or proceedings pending under earlier laws

A. Pending refund claims under existing laws

  • The pending refund claims shall be disposed of in accordance with the provisions of the earlier law
  • Where any claim for refund is fully or partially rejected, the amount so rejected shall lapse. (Section 154)

B. Appeals or revision relating to pending CENVAT/ITC claims / recovery under existing laws

  • It shall be disposed of in accordance with the provisions of the earlier law only in both the cases of claim or recovery. (Section 155)
  • The refund shall be made in accordance with the provisions of the earlier law only.
  • In case any recovery is to be made then it will be made as an arrear of tax under GST.
  • The amount shall be refunded/ recovered as the case may be and the same shall not be admissible as ITC under GST Law.

C. Finalization of proceedings relating to output duty liability

  • It shall be disposed of in accordance with the provisions of the earlier law only. (Section 156)
  • The refund shall be made in accordance with the provisions of the earlier law only.
  • In case any recovery is to be made then it will be made as an arrear of tax under GST.
  • The amount if any be refunded/ recovered shall not be admissible as ITC under GST Law.

13. Existing and continuing officers under existing Laws

Deemed appointment as GST officers or Competent Authorities under the respective provisions of GST law (Section 141)

The above article has been prepared based on “FAQs on GST” by NACEN as well as Model GST Law  available in public domain. Coming ahead are posts on other GST topics. Stay updated.

Post in your queries if any. Also let us know if you encounter any error or omission to help us improve.

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