Navigating the Transition to India's Goods and Services Tax Regime

India's Goods and Services Tax (GST) system unified various indirect taxes into a single framework. Establishing clear regulations was crucial to facilitate a seamless transition for registered businesses moving to the new tax environment.

Input Tax Credit Transfer

Specific provisions were established to enable the smooth transfer of Input Tax Credit (ITC) from previous tax systems, such as VAT, Excise Duty, and Service Tax, into the GST framework. However, a registered dealer who chose the composition scheme under GST was not permitted to carry forward any ITC from the prior regime.

The following scenarios illustrate when ITC transition rules would apply.

Carrying Forward Closing Input Credit Balances

Businesses could transfer the closing balance of their ITC, as reported in the final tax return filed under the pre-GST laws, to the GST system. This credit was contingent upon the timely filing of returns for the preceding six months (January to June 2017) under the old tax regulations (VAT, Excise, and Service Tax).

To carry forward ITC, taxpayers were required to file Form TRAN 1 by December 27, 2017. Following a Supreme Court decision, a specific period from October 1 to November 30, 2022, was provided for taxpayers to submit or amend their TRAN-1 forms, with only one rectification allowed.

Input Tax Credit on Capital Goods

Prior to GST implementation, the input tax paid on capital goods was only partially claimable as credit. For instance, if the ITC on a capital good acquired in the 2016-17 financial year amounted to Rs 10,000, typically 50% (Rs 5,000) could be claimed in that year, with the remaining Rs 5,000 claimable in the subsequent year.

Any unutilized credit on such capital goods could be carried forward into the GST regime by providing the necessary details in Form TRAN 1.

Input Tax Credit on Closing Stock

Manufacturers and service providers holding closing stock on which excise duty or VAT was paid were eligible to claim credit for it. Dealers were required to declare this stock on the GST Portal. Claiming this credit necessitated possession of invoices that were not older than one year.

Handling Cases Without Invoices

Manufacturers and service providers unable to provide duty payment invoices could not claim credit under GST. However, traders were permitted to claim credit even without invoices, provided these conditions were met:

• The stock in question was distinctly identifiable.
• The trader ensured that the benefit of this credit was passed on to the end consumer through reduced prices.

Calculating Credit Without Invoices

The credit calculation in the absence of invoices was based on the GST rate applicable to the goods:

ITC for Newly Registered Persons or Those Exempted Previously

Input Tax Credit on stock held on July 1st was also available to various categories of persons, including:

• Dealers newly registered under GST who were not registered under the former tax laws.
• Entities involved in manufacturing exempted goods or providing exempted services.
• Providers of works contract services who previously utilized abatement benefits.
• First-stage or second-stage dealers.
• Registered importers.

To claim this ITC, several conditions needed to be satisfied:

• The inputs or goods were intended for use in making taxable supplies.
• The benefit derived from this credit was to be transferred to the recipient through lower prices.
• The taxable person qualified for ITC on these specific inputs.
• The individual held invoices that proved duty payment under the previous laws.
• These invoices were not older than 12 months.
• The service supplier was not eligible for any abatement under GST.

Input Tax Credit on Goods Dispatched Before July 1st

Manufacturers or dealers could claim ITC for goods received after the GST implementation date, provided tax on these goods had been paid under the preceding laws. This credit was permissible only if the relevant invoice or tax payment document was entered into the recipient's accounts by August 1, 2017. A delay in recording could be accommodated with a thirty-day extension, granted by the competent authority for valid reasons.

Handling Refunds and Tax Arrears

Any pending claims or appeals related to refunds of CENVAT credit, tax, or interest paid before July 1st were processed under the provisions of the former tax laws. Conversely, any amounts identified as payable under the previous regime were reclassified as GST arrears and recovered in line with GST regulations.

Additional Transitional Scenarios

Job Work Provisions

No tax was levied on inputs or semi-finished goods dispatched for job work and subsequently returned to the factory on or after July 1st, provided specific conditions were met:

• The goods were returned to the factory within six months of July 1st (with a possible two-month extension).
• Any goods held by the job worker were duly declared in Form TRAN-1.
• Semi-finished goods were supplied either upon tax payment in India or exported out of India within six months from July 1st (also extendable by up to two months).

Similarly, finished goods removed for processing before July 1st and returned within six months were not subject to tax. However, if goods were not returned within the stipulated six-month period, the associated Input Tax Credit would be recovered.

Input Tax Credit Distribution by Input Service Distributors

Transitional rules also covered situations where services were received before July 1st, but the corresponding invoices arrived on or after that date. In such instances, an Input Service Distributor (ISD) was authorized to distribute the Input Tax Credit under the GST regime.

Conditions for Former Composition Dealers Claiming ITC

A registered dealer who previously operated under the composition scheme but transitioned to being a normal taxpayer under GST could claim credit for inputs available on July 1st, provided these conditions were met:

• The inputs were designated for use in taxable supplies.
• The registered person was eligible for ITC under GST.
• Valid invoices or other duty payment documents were accessible.
• The invoices were not older than twelve months.

Official Verification of Transitional Credit

CGST Circular 182, issued on November 10, 2022, outlined the verification process for transitional credit claims made by taxpayers who migrated to GST. This applied specifically to claims submitted during the special window on the GST portal from October 1 to November 30, 2022. The verification period for these applications commenced on December 1, 2022, and concluded on or before February 28, 2023.

Taxpayers should be aware of these key instructions when filing or revising TRAN-1:

• Beyond online submission, a self-certified, downloaded copy of the filed or revised TRAN-1 and an Annexure-A declaration had to be submitted to the relevant jurisdictional tax officer, as per CGST Circular No. 180 (September 9, 2022).
• If TRAN forms were revised during this special window without any substantive changes, the officer might reject the application, but only after providing the applicant a reasonable opportunity to be heard.
• The choice of verifying officer depended on whether the applicant fell under Central or state/Union Territory jurisdiction.
• Annexure-I of the guidelines pertained to claiming CGST transitional credit. Taxpayers needed to consult specific state/UT guidelines for SGST transitional credit.
• For claims involving both CGST and SGST components, regardless of the primary administrative jurisdiction, the tax officer was required to consult with their counterpart in the other component weekly, providing a list of GSTIN/ARN and a ten-day response period. The jurisdictional officer would then complete their verification within seven days of receiving the counterpart's report.
• In cases of pending appellate or adjudication proceedings, the officer could review the reasons for rejecting or not approving the transitional credit in the related notice or order.
• The referred counterpart verification officer, upon completing their review, was to submit observations and an order using the format specified in Annexure II of the guidelines, detailing accepted or rejected amounts and the underlying reasons.
• Generally, the jurisdictional officer was expected to issue a report within fifteen days of any personal hearing, not exceeding a total of 90 days.
• Taxpayers might be asked to provide additional information and supporting documents, such as GST returns or invoices.
• If an erroneous additional amount was credited to the electronic credit ledger, this excess amount could be demanded and recovered from the applicant, along with applicable interest and penalties.

Checklist for Verifying Transitional Credit

Taxpayers filing or revising their TRAN-1 could benefit from the following 12-point checklist:

1. CENVAT Credit Balance: Verify that the transitional credit declared in Table 5(a) is equal to or less than the closing balance of CENVAT credit from Excise return 1, 2, or 3, or Service Tax return-3, after excluding education cess, secondary education cess, Swachh Bharat Cess (SBC), or Krishi Kalyan Cess (KKC). Confirm the final excise or service tax return was filed.
2. Disallowed Credits: Be aware that certain credits, such as Education cess, Krishi Kalyan cess, clean energy cess, VAT credit, and Personal Ledger Account (PLA) balance, are not eligible for transitional credit claims.
3. Return Filing Compliance: Ensure that returns for the preceding six months (January to June 2017 for ER-1/ER-2, and periods ending March and June 2017 for ER-3 and ST-3) were filed before the GST transition date. This check applies whether units merged or split during GST implementation.
4. Capital Goods Reporting: Transitional credit on capital goods, especially for second installments, must be exclusively reported in Table 6 to prevent double claiming by also reporting in Table 5(a). This table is irrelevant if no pre-GST credit was availed.
5. Exempted Input Handling: For taxpayers who used inputs exempted under the pre-GST regime, Rule 6 of the CENVAT credit Rules applies. If only exempted goods or services were provided, Table 5(a) should be zero, with credit only available for semi-finished goods on the transition date. If both taxable and exempt supplies were made, transitional credit flows into Table 5(a), and common credit is reported in Table 7A.
6. Credit Transfer Document (CTD): Maintain records of the Credit Transfer Document (CTD) as a new taxpayer, as mandated by Rule 15 of the CENVAT credit Rules.
7. Stock-related Transitional Credit: Ensure transitional credit claimed on stock is reasonable, available upon sale, and filed via TRAN-2. The declared stock must align with corresponding credit in VAT returns or supporting documents. Such details move from TRAN-2 into the electronic credit ledger.
8. Credit Declaration Consistency: Confirm that transitional credit is declared either in Table 5(a) of TRAN-1 or in TRAN-2.
9. Documentary Evidence and ISD Credits: Verify the existence of supporting documents (duty-paying documents) and their proper accounting in books. Ensure Input Service Distributor (ISD) credits are claimed in accordance with legal provisions.
10. Centralized Unit Reporting: Centralized registered units transfer credits using Table 8; consequently, receiving units should not report this amount in their TRAN-1.
11. Service Tax and VAT Credit: Confirm that service tax input credit adheres to Service Tax law and was utilized for supplies made after July 1, 2017. Input VAT credit cannot be claimed as CGST credit.
12. Avoiding Double Credit: Crucially, tax credits claimed through TRAN-1 or TRAN-2 filings must not be reported in GSTR-3B, as this constitutes double credit.

For further information on TRAN 1 and TRAN 2 forms, refer to details on transitioning old input credits to the GST regime.