Managing Input Tax Credit Transition from Old Regimes to GST

Businesses moving to the Goods and Services Tax (GST) regime often face the challenge of carrying forward tax benefits and input credits from the previous tax system. These credits might arise from purchases of inputs, raw materials, semi-finished goods, finished goods, or materials sent to job workers. For many businesses, these input taxes were available as credit on June 30, 2017, and transferring them to the GST framework is crucial to utilize their value.

To facilitate a seamless transition and allow businesses to carry forward their input tax credit, the Central Board of Indirect Taxes and Customs (CBIC) introduced specific transition rules and forms.

Recent Updates:

October 1, 2022: The GST portal reactivated the option to file or revise previously submitted TRAN 1/2 forms, following a directive from the Supreme Court. This filing window was available from October 1, 2022, to November 30, 2022. Additionally, the GST portal issued an advisory explaining the updated procedures for claiming transitional ITC.

How to Claim Input Tax Credit on Old Stock and Which Form to Use

Any business holding closing stock on the GST appointed day, irrespective of its prior registration status, is eligible to claim input tax credit for taxes paid under the pre-GST regime. This ITC claim is subject to certain conditions.

To assist businesses with this transition and the carry-forward of input tax credit, the CBEC released two key transition forms: TRAN 1 and TRAN 2.

Note: TRAN 1 can only be revised once. After rectification, no further changes are permitted. ^Following the Supreme Court's directive, the GST portal re-opened the facility to file or revise earlier TRAN 1/2 from October 1, 2022, to November 30, 2022.

Key Aspects of Transitioning to GST

Transitioning to GST primarily involves these areas:

• Input Tax Credit (ITC): Carrying forward eligible ITC from the old regime into the new GST system (reported in TRAN-1).
• Job Work Arrangements: Ensuring continuity for materials sent to job workers (reported in TRAN-1).
• Agent-Principal Dealings: Reporting dispatches of goods and works contracts involving agents (reported in TRAN-1).
• Tax Refunds and Claims: Managing refunds and claims from the old regime (not reported in TRAN-1 or TRAN-2).

Important Considerations for GST Transition

• Transition forms must be filed separately for each Goods and Services Tax Identification Number (GSTIN).
• Any credit intended for carry-forward from the old regime must also qualify as eligible credit under GST.
• Accumulated credits from the old regime can be transferred to GST, provided that returns for the preceding six months under the old regime have been filed accurately (e.g., VAT, Excise, Service Tax).
• Central taxes and duties, such as Excise and Service Tax, will be carried forward as Central GST (CGST).
• State taxes, such as VAT, will be carried forward as State GST (SGST).

Required Information for TRAN 1

Here is a breakdown of the specific information needed for TRAN 1:

1. GSTIN: Your Goods and Services Tax Identification Number.

2. Legal Name of Registered Person: Your full legal name.

3. Trade Name: Any trade name you use.

4. Confirmation of Returns Filing: Confirm with a Yes/No if all required returns under the existing law for the past six months have been submitted. The ability to claim CENVAT/VAT credit closing balances in your GST electronic ledger is contingent on filing returns for the previous six months under the old regime.

5. Tax Credit Carried Forward from Existing Laws: This section requires details of all CENVAT credit you wish to transfer to GST. Specifically, it involves sub-sections 5a, 5b, and 5c.

   a) CENVAT Credit Carried Forward as Central Tax: This applies to registered persons (excluding those under the composition scheme) who were registered and filed returns under the old regime, as per Section 140(1) and Section 140(4)(a) of the CGST Act. This includes input credit related to taxable supplies for businesses that manufactured/provided both taxable and exempted goods/services under the old regime. Such individuals can claim the excise and service tax input credit balance reflected in their returns. This table is for manufacturers or service providers with a closing balance of CENVAT credit in their return as of June 30, 2017.

   Details to be provided:

   • Serial Number
   • Registration number under existing law (Central Excise and Service Tax)
   • Tax period of the last return filed under the existing law (e.g., monthly ER-1, quarterly ER-3)
   • Date of filing the specified return
   • Balance CENVAT carried forward in the last return
   • CENVAT credit admissible as ITC of central tax under transitional provisions

   b) Tax Credit for C Forms, F Forms, and H/I Forms for Carry Forward: This information is required for the period from April 1, 2015, to June 30, 2017.

   Recap of these forms:

   • C Forms: Issued by a registered purchasing dealer to a registered seller during interstate sales, reducing Central Sales Tax (CST) to 2%.
   • F Forms: Used for tax-free branch transfers. Issued by the receiving branch/consignment agent to the head office/principal sending the goods, proving it's a stock transfer, not a sale.
   • H/I Forms: Used for local purchases made without tax payment for exports. Issued by an exporter/buyer for interstate purchases intended for export, exempting the seller from CST.

   For each form, provide:

   • TIN of Issuer
   • Name of Issuer
   • Serial Number of Form
   • Amount
   • Applicable VAT Rate

   c) Tax Credit for State/UT Tax for Pending C Forms, F Forms, and H/I Forms: This applies to all registrations under the same PAN within the same state. If a business registered under State VAT has pending C-Form, F Form, or H/I Form, differential tax must be paid due to ineligibility for concessional CST rates. This differential tax is deducted from the input tax credit balance in the last filed return, with the remaining credit carried forward under GST.

   Details to be provided:

   • Registration number under State VAT (TIN).
   • Closing balance of input tax credit in the return for the period ending June 30, 2017.
   • Turnover for which C-Form, F Form, and H/I Form are pending.
   • Differential tax on respective turnover (e.g., if concessional CST is 2% and VAT is 14.5%, the differential is 12.5%). This amount reduces the closing balance of input tax credit.
   • ITC reversed related to C-Form and F Form turnover. This amount is eligible for carry-forward as ITC under GST and is added to the amount in the closing balance.
   • The balance ITC of VAT/Entry tax transferred to GST is calculated as: Column 2 – (Column 4 + Column 6 – Column 7 + Column 9).

6. Details of Capital Goods with Unavailed Credit: Section 140(2) addresses unavailed input credit on capital goods. Credit for taxes paid on capital goods is often spread across multiple financial years. If the full input tax credit could not be claimed by June 30, 2017, the remaining portion can be claimed here. This section covers CENVAT credit for capital goods that was not carried forward in an old regime return; if carried forward previously, it would be included in section 5a.

   This information is split into 6a and 6b:

   a) Central Tax Portion of Unavailed ITC on Capital Goods: This pertains to unavailed CENVAT credit for Excise Duty, SAD, or CVD on capital goods, which will be carried forward to the electronic ledger as central tax.

   Details required:

   • Invoice number and date of the capital good.
   • Supplier’s registration number under the old excise regime (ECC number).
   • Your (recipient’s) registration number (Service Tax registration number or ECC number).
   • Value of the capital good.
   • Excise Duty or CVD paid.
   • SAD paid.
   • CENVAT Credit eligible under the old regime (cannot exceed total of Excise Duty/CVD and SAD).
   • CENVAT Credit already availed under the old regime (cannot exceed eligible credit).
   • Balance unavailed CENVAT Credit (eligible as ITC of Central Tax).

   b) State/UT Tax Portion of Unavailed ITC on Capital Goods: This section requires details of unavailed CENVAT credit for VAT or Entry Tax (State/UT Tax) on capital goods for all registrations under the same PAN and in the same state.

   Details required:

   • Invoice number and date of the capital good.
   • Supplier’s registration number under relevant State VAT (TIN).
   • Your (recipient’s) registration number (VAT registration/TIN).
   • Value of the Capital Good.
   • VAT or Entry Tax paid on the capital good.
   • Total VAT and Entry Tax credit eligible under the relevant State VAT Act (cannot exceed total paid).
   • Total VAT/Entry Tax credit already availed under the old regime (cannot exceed eligible credit).
   • Balance unavailed credit of VAT & Entry Tax (admissible as SGST/UTGST in GST Regime).

7. Details of Inputs Held in Stock (Sections 140(3), 140(4)(b), and 140(6)): This section is for claiming input tax credit by manufacturers or dealers who were previously unregistered, or who dealt in exempted goods. It focuses on inputs held as stock.

   This portion of TRAN-1 primarily applies to GST-registered businesses that:

   • Were not required to be registered under the old regime.
   • Manufactured exempted goods or provided exempted services.
   • Provided works contract services and availed abatement (builders).
   • Were a first-stage dealer, second-stage dealer, registered importer, or a manufacturer's depot.

   It also applies to individuals who manufactured both taxable and exempted goods or provided taxable and exempted services, where tax on stock/inputs used for exempted supply under the old regime is now taxable under GST (Section 140(4)(b) of the CGST Act).

   Furthermore, it covers persons registered as a composition dealer under the old regime (paying tax at a fixed rate) but are now normal registered taxpayers under GST.

   All these individuals can claim credit for eligible taxes on their stock if they meet the following conditions:

   • The stock is used or will be used for making taxable supplies under GST.
   • The input credit is eligible under GST.
   • They possess an invoice or other documents proving duty payment under the old regime for such inputs.
   • These invoices or documents are not older than 12 months from June 30, 2017.
   • The service provider is not eligible for any abatement under GST.
   • They have not opted for the composition scheme.

   Essentially, these are persons who held stock on June 30, 2017, but couldn't claim credit through returns mentioned in sections 5a, b, or c of FORM GST TRAN-1.

   a) Input Credit Claims Other Than Those in 5a: Provide the following:

   • HSN (6-digit level)
   • Unit
   • Quantity
   • Value
   • Eligible duties paid on such inputs

   Part 7A is for manufacturers or service providers to claim input tax credit of excise duty or service tax as CGST, where duty-paid invoices or other documents are available for inputs or inputs in semi-finished/finished goods.

   Part 7B is exclusively for non-manufacturers or non-service providers who were unregistered in the old regime (dealers or traders) to provide information on inputs where duty-paid invoices or documents are unavailable. Such persons also need to file TRAN-2.

   b) VAT and Entry Tax Paid on Inputs/Input Services: This is for situations where input or input services are received on or after July 1, 2017, but the duty or tax was paid by the supplier under the old regime. A registered person can claim credit for eligible duties and taxes if the invoice is recorded in books within 30 days from July 1st (extendable by the Commissioner GST for another 30 days). This is under Section 140(5) of the CGST Act.

   Details to be submitted:

   • Name of the supplier.
   • Invoice number and date.
   • Description, quantity (if goods), unit of measurement (if goods), and taxable value of the supply.
   • Eligible duties.
   • VAT/Entry Tax on such goods.
   • Date of entry in books of account (must be within the allowed timeframe).

   c) Amount of VAT and Entry Tax Paid on Inputs Supported by Invoices/Documents Carried Forward as SGST/UTGST (Sections 140(3), 140(4)(b), and 140(6)):

   • Details of the stock: description, unit, quantity, value, and State Tax (VAT or Entry Tax).
   • Total input tax credit already claimed under the old regime.
   • Input tax related to exempt sales (old regime) but now taxable under GST. This ITC, previously unclaimed, is now eligible if goods are taxable or if a composition dealer becomes a normal taxpayer.
   • The remaining balance eligible as input credit of SGST/UTGST.

   d) Stock of Goods Not Supported by Invoices/Documents (for single-point VAT states only): This section is for traders or dealers unregistered under the old regime who lack invoices or documents proving VAT/Entry Tax payment, which will be claimed as SGST ITC after filing FORM GST TRAN-2. This does not apply to manufacturers or service providers and is specific to states where VAT was paid at a single point (e.g., by manufacturer or importer).

   Provide the following:

   • Description
   • Unit
   • Quantity
   • Value
   • Tax paid

8. Details of CENVAT Credit Transfer for Centralized Registration (Section 140(8)): This applies to the transfer of input tax credit related to service tax.

   Required details:

   • Service tax registration number.
   • Tax period of the last ST-3 service tax return filed (April to June 2017).
   • Date of filing returns for the April-June 2017 period (due August 15, 2017).
   • Closing balance of CENVAT credit carried forward in the ST-3 return for April-June 2017. This credit can be transferred to any registered person with the same PAN that had centralized registration under the old regime.
   • GSTIN of all branches (receivers) that had centralized registration under service tax with the same PAN, to whom credit is transferred.
   • Document number and date for credit distribution.
   • Input tax credit of central tax transferred to each branch (total cannot exceed the overall closing balance).

9. Details of Goods Sent to Job Worker and Held in Stock (Section 141):

   a) Sent as Principal: A principal who sent goods to a job worker must provide:

   • GSTIN of the job worker (if registered under GST).
   • Unique challan number and date issued for transferring goods to the job worker.
   • Type of goods (inputs, semi-finished, or finished goods).
   • HSN Code, description, unit of measurement (e.g., kgs, boxes), quantity, and value of the stock held.

   b) Held as Job-Worker: A job worker must provide details of goods held on behalf of the Principal:

   • GSTIN of the Principal (if registered under GST).
   • Unique challan number and date issued for transferring goods to the Principal.
   • Type of goods (inputs, semi-finished, or finished goods).
   • HSN Code, description, unit of measurement, quantity, and value of the stock held.

10. Details of Goods Held in Stock as Agent (Section 142(14) of the SGST Act): Section 142(14) permits an agent to claim tax credit on goods or capital goods belonging to the principal and lying at the agent's premises on the appointed day, provided certain conditions are met:

    • The agent is registered under GST.
    • Both principal and agent declare details of stock (goods or capital goods) with the agent on June 30, 2017.
    • Invoices for such goods/capital goods were issued no earlier than 12 months before July 1, 2017.
    • The principal has either reversed any claimed input tax credit or has not availed ITC for such goods/capital goods.

    a) Details of Goods Held as Agent: If you are an agent, provide details of unsold stock held on behalf of the Principal as of June 30, 2017:

    • GSTIN of Principal.
    • Description, unit of measurement, quantity, value of stock, and input tax to be claimed.

    b) Goods Sent as Principal Held by the Agent: If you are a principal, provide details of stock sent to the agent and unsold as of June 30, 2017:

    • GSTIN of Principal.
    • Description, unit of measurement, quantity held, value of stock, and input tax to be claimed by your agent.

11. Details of Credit per Section 142(11)(c): This section applies to works contractors who paid both VAT and Service Tax on a supply. If GST is now leviable on that supply, the contractor is entitled to claim credit for VAT and Service Tax paid to the extent of supplies made after July 1, 2017.

    Required details:

    • Registration number or TIN (State VAT registration number).
    • Service Tax Registration Number.
    • Invoice number and invoice date.
    • GST paid by the contractor.
    • VAT and Service Tax paid (to the extent of supplies made after July 1, 2017) claimed as ITC of SGST and CGST, respectively.

12. Details of Goods Sent on Approval Basis Six Months Prior to July 1, 2017 (Section 142(12)): This is for goods sent on approval not earlier than six months before July 1, 2017.

    Required details:

    • Document number and date for goods transfer.
    • GSTIN of recipient (if applicable).
    • Name and address of the recipient.
    • HSN Code, description, unit (e.g., Kgs/Mtr), quantity, and total value of goods sent.

Filing TRAN 2

FORM TRAN–2 is for dealers/traders who are registered under GST but were unregistered under the old regime and lack VAT or excise invoices for stock held on June 30, 2017. They can use TRAN-2 to claim tax credit on their stock. Manufacturers or service providers cannot file FORM GST TRAN–2. TRAN-2 must be filed monthly by a dealer or trader to report stock sales and claim input tax credit.

Conditions for filing TRAN-2:

• Goods were not wholly exempt from excise/VAT or nil-rated under Excise/VAT.
• The scheme is operative for six months from July 1, 2017 (stock must be cleared by end of December to claim credit).
• Proof of procurement for such goods is available.
• The stock for which credit is claimed is stored in a manner that allows easy identification.

Details Required in TRAN 2

• GSTIN: Your GSTIN.

• Name of Taxable Person: Your name.

• Tax Period: The month and year for which the form is filed.

• Details of Inputs Held in Stock on July 1st Without Invoice/Document Evidencing Tax Payment (Carried Forward to Electronic Credit Ledger):

  Stock held without supporting document showing payment of Excise Duty (Central Tax): If you lack a document showing Excise Duty payment, provide details as follows:

  • HSN code of the opening stock for the month.
  • Unit of measurement of the opening stock.
  • Quantity of opening stock.
  • Quantity of goods sold in the month.
  • Taxable value of goods sold for the month.
  • CGST if sold intra-state.
  • IGST if goods sold inter-state.
  • Credit of central tax (input credit of CGST) claimed:
    • If CGST paid (column 6) is 9% or more, ITC is 60% of column 6. Otherwise, it's 40%.
    • If IGST paid (column 7) is 18% or more, ITC is 30% of column 7. Otherwise, it's 20%.
  • Quantity of opening stock for the relevant tax period (calculated by deducting sold quantity from opening quantity).

Unavailed ITC Related to Capital Goods

Taxpayers under the pre-GST regime could not always avail 100% ITC on capital goods at the time of purchase. If a registered person purchased capital goods and couldn't claim the full tax amount, the remaining ITC can be claimed under GST. For each capital good, invoice-wise details required are:

1. Total CENVAT Credit on such capital goods.
2. Amount of ITC availed or utilized until July 1st.
3. Amount of ITC remaining unavailed or unutilized until July 1st.

Stock Held Being Sent or Received for Job Work

When a principal manufacturer sends goods for job work and these goods remain with the job worker on July 1st, it is considered stock held by the principal manufacturer, for which tax credit will be allowed. Both the principal manufacturer and job worker must file details for goods:

1. Held as a job worker on behalf of the principal.
2. Sent to a job worker for job work by the principal.

Basic details to be mentioned:

• Challan number and date.
• Type of goods (raw material, semi-finished/finished goods).
• Description of goods: HSN, unit, quantity, value.
• GSTIN of manufacturer or job worker.

Goods Sent to Agent or Consignment Dealer for Sale

If a principal dealer or manufacturer sends goods to an agent or consignment dealer for sale, and the stock is still with the agent on July 1st, it is considered stock held by the principal for which tax credit will be allowed. Both the principal dealer/manufacturer and the agent/consignment dealer must file details for goods:

1. Held as an agent or consignment dealer on behalf of the principal.
2. Sent to an agent or consignment dealer by the principal.

Basic details to be mentioned:

• GSTIN of principal dealer or manufacturer.
• Description of goods: unit, quantity, value, and ITC to be claimed.

Conditions for Claiming Input Tax Credit

Percentage of Input Tax Credit Claim Available

Registered persons under GST can claim credit for taxes paid on goods held in closing stock as of the appointed date. If an invoice or other document evidencing tax payment under the VAT Act or Central Excise is unavailable, credit is allowed based on the IGST, CGST, and SGST rates for the closing stock under GST, according to the HSN code. When the taxpayer sells the goods from closing stock as of June 30, they must first pay appropriate taxes on the outward supply, and then they will be allowed ITC based on the tax rate paid for that outward supply.

Example: Mr. Avinash holds 1000 units of umbrellas as closing stock on June 30. On July 15, he sells 100 umbrellas for Rs. 100 each, with IGST applicable at 12%.

• Taxable value: Rs. 10,000/-
• Tax amount: Rs. 1,200/- Since the IGST rate is less than 18%, ITC will be allowed at 20%. Therefore, ITC allowed will be 20% of Rs. 1,200/-, which is Rs. 240/-.

A registered person can claim ITC in this manner for six tax periods from the appointed date (July 2017 to December 2017). For each period, a statement detailing supplies in Form TRAN 2 must be filed by the end of the tax period.

Conditions for Claiming Central Tax and State Tax Credit (Applicable for States with Tax on MRP Scheme)

• The central tax or state tax payable on such supply must have been paid.
• Such goods were not wholly exempt from Excise Duty, Nil rated, or exempt under the relevant State VAT Act.
• A document for the procurement of such goods is available with the registered person.
• Details of stock held at the end of each of the six tax periods, including details of supplies effected during the period, must be furnished in FORM TRAN-2.
• The allowed credit amount will be credited to the Electronic Credit Ledger.
• The stock on which credit is availed must be stored in a way that allows easy identification by the registered person.

For a summary of Transition Provisions, Rules, and Formats, refer to this PPT.

You can download Form Tran 1 and Tran 2 here.