The Goods and Services Tax (GST) system in India unifies several indirect taxes. To facilitate a seamless shift for registered businesses, specific transitional provisions were established. Regulations were implemented to allow for a smooth transfer of Input Tax Credit (ITC) from previous tax systems, such as VAT, Excise Duty, or Service Tax, into the GST framework. However, a registered dealer choosing the composition scheme cannot transfer any existing ITC from the prior regime. Several scenarios qualify for these ITC transition provisions:

Input Tax Credit

Regulations were implemented to allow for a smooth transfer of Input Tax Credit (ITC) from previous tax systems, such as VAT, Excise Duty, or Service Tax, into the GST framework. However, a registered dealer choosing the composition scheme cannot transfer any existing ITC from the prior regime. Several scenarios qualify for these ITC transition provisions:

Closing balance of credit on Inputs

Any remaining ITC balance from the final return submitted before GST implementation can be claimed as credit within the GST system. This credit is only permitted if the tax returns for the six months preceding GST (January to June 2017) were duly filed under the previous tax laws (VAT, Excise, and Service Tax). To transfer Input Tax Credit, Form TRAN-1 was originally required to be filed by December 27, 2017. Following a Supreme Court decision, a specific window for filing or revising TRAN-1 was available from October 1 to November 30, 2022. It's important to note that TRAN-1 allows for only one rectification.

Credit on Capital Goods

Prior to the GST regime, only a portion of the input tax paid on capital goods was eligible for credit. For instance, if the ITC on a capital good acquired in 2016-17 was Rs 10,000, an amount of Rs 5,000 (50%) could be claimed in that year, with the remaining Rs 5,000 claimed the following year. Any unutilized credit on capital goods under these circumstances could be transferred to GST by accurately reporting the specifics in Form TRAN-1.

Credit on Stock

Manufacturers or service providers holding closing stock on which duty has already been paid are eligible to claim credit. Dealers must declare such stock on the GST Portal. To claim this credit, dealers must possess invoices that are not older than one year.

What if Invoices are Unavailable?

Manufacturers or service providers lacking an invoice proving duty payment are ineligible to claim credit under GST. However, traders may claim credit without an invoice, provided these conditions are met:

• The stock must be distinctly identifiable.
• The trader must pass on the credit benefit to the end consumer.

Credit Calculation Without Invoice

| Rate of GST on Goods | Intra-state Credit to CGST | Inter-state Credit to IGST | |---| | 18% or more | 60% | 30% | | Less than 18% | 40% | 20% |

Registered persons who were not registered under previous law

Individuals registered under GST who were previously unregistered under older tax laws are also eligible for ITC on inputs held in stock as of July 1st. This includes those involved in manufacturing exempted goods, providing exempted services, offering works contract services with abatement, first-stage or second-stage dealers, and registered importers. The following criteria must be satisfied:

• The inputs or goods must be utilized for making taxable supplies.
• The benefit of this credit must be passed to the recipient through reduced prices.
• The taxable person must be entitled to input tax credit on these inputs.
• The person must hold invoices demonstrating duty payment under the former law.
• The invoices must not be more than 12 months old.
• The service supplier must not be eligible for any abatement under GST.

ITC on Goods Sent Before 1st July

Manufacturers or dealers can claim input tax credit for goods received after the GST implementation date, provided tax on these goods was already paid under prior laws. These credits are permissible only if the invoice or tax payment document is recorded in the person's accounts by August 1, 2017. Authorities may grant a 30-day extension if there is a valid reason for delay.

Refunds and Arrears

Pending claims or appeals for CENVAT credit refunds, tax, or interest paid before July 1st will be resolved under the former tax laws. Any outstanding amounts determined as payable under the previous regime will be reclassified as GST arrears and recovered in line with current GST regulations.

Other Cases

Job Work

No tax is due on inputs or semi-finished goods dispatched for job work, undergoing specific processes, and returned on or after July 1st. Conditions for tax exemption include:

• Goods must be returned to the factory within six months of July 1st (with a potential two-month extension).
• Goods held by the job worker must be declared in Form TRAN-1.
• Supply of semi-finished goods must occur upon tax payment in India or be exported from India within six months of July 1st (with a potential two-month extension).

Similarly, finished goods removed before July 1st for specific processes and returned within six months are exempt from tax. However, if goods are not returned within this six-month period, input tax credit will be reclaimed.

Credit Distribution by Input Service Distributor

Transitional regulations apply when services were received before July 1st, but invoices for those services arrived on or after that date. In such instances, an Input Service Distributor (ISD) is authorized to distribute input tax credit under the GST framework.

Composition Dealer

A registered dealer who previously operated under the composition scheme but is now a standard taxpayer under GST can claim credit for inputs held as of July 1st, provided specific conditions are met:

• The input must be used for taxable supply.
• The registered person must be eligible for ITC under GST.
• Invoices or other documents proving duty payment must be available.
• Such invoices must not be older than twelve months.

Verification of Transitional credit by officer

CGST Circular 182, issued on November 10, 2022, outlined the process for verifying transitional credit claims made by taxpayers who migrated to GST during a special window from October 1 to November 30, 2022, via the GST portal. The verification period for these claims commenced on December 1, 2022, and concluded by February 28, 2023. Key considerations for taxpayers when filing or revising TRAN-1 include:

• In addition to online submission, taxpayers must provide a self-certified, downloaded copy of their filed or revised TRAN-1 and an Annexure-A declaration to their jurisdictional tax officer. Refer to CGST Circular No. 180 (September 9, 2022) for specific instructions.
• If TRAN forms are revised during this special window, the officer may reject the application if no alterations are detected, after providing the applicant a fair hearing.
• The choice of verifying officer depends on whether the applicant falls under Central or state/UT jurisdiction.
• Annexure-I of the guidelines pertains to claiming CGST transitional credit. For SGST transitional credit, taxpayers should consult their respective state/UT guidelines.
• If both CGST and SGST components are present, regardless of central or state jurisdiction, the tax officer must weekly consult the corresponding officer for the other component, providing a list of GSTINs/ARNs and a ten-day deadline. The jurisdictional officer must complete verification within seven days of receiving the counterpart's report.
• If appellate or adjudication proceedings are ongoing, the officer can review the grounds for denying or approving transitional credit stated in the notice or order.
• The counterpart verification officer who was referred to by the jurisdictional officer, upon finishing verification, must submit observations and an order using the format in Annexure II of the guidelines, detailing admitted or rejected amounts with justifications.
• Generally, the jurisdictional officer is expected to issue a report within fifteen days of the personal hearing, not exceeding 90 days.
• Taxpayers might be requested to supply additional information and supporting documents, such as GST returns or invoices.
• If an additional amount is credited to the electronic credit ledger, any excess amount can be recovered from the applicant, along with applicable interest and penalties.

Annexure-I – Checklist for verifying Transitional Credit

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

• The closing CENVAT credit balance from Excise return 1, 2, or 3, or Service Tax return-3, should be equal to or less than the transitional credit in Table 5(a), after deducting education, secondary education, SBC, or KKC cess. Verify that the last excise or service tax return was filed.
• Certain credits, such as Education cess, Krishi Kalyan cess, clean energy cess, VAT credit, and PLA balance, are not permitted as transitional credit.
• Confirm that returns for the last six months before the transition (ER-1/ER-2 from January to June 2017, ER-3 and ST-3 for periods ending March and June 2017) were filed. This check applies to units that merged or split during GST implementation.
• Ensure transitional credit on capital goods is reported exclusively in Table 6, especially for second installment claims, to avoid double availment if also reported in Table 5(a). This table is irrelevant if no pre-GST credit was taken.
• For taxpayers who migrated and used inputs exempted under the pre-GST regime, adhere to Rule 6 of CENVAT Credit Rules. If only exempted goods are manufactured or services provided, Table 5(a) should be zero, with credit only available for semi-finished goods as of the transition date. If both taxable and exempt supplies are made, transitional credit goes to Table 5(a), and common credit must be in Table 7A.
• Maintain records of the Credit Transfer Document (CTD) as a new taxpayer, as stipulated by Rule 15 of CENVAT Credit Rules.
• Transitional credit on stock must be justifiable, available upon sale, and declared when filing TRAN-2. Verify that declared stock matches corresponding credit in VAT returns or supporting documents. Details from TRAN-2 then flow into the electronic credit ledger.
• Confirm that transitional credit is declared either in Table 5(a) of TRAN-1 or in TRAN-2.
• Verify the existence of supporting duty payment documents and their proper accounting. Ensure ISD credits are claimed according to legal provisions.
• Centralized registered units use Table 8 to pass on credits, meaning receiving units should not report these amounts in their TRAN-1.
• Verify that service tax input credit aligns with Service Tax law and was utilized for supplies made after July 1, 2017. Input VAT credit cannot be claimed as CGST credit.
• Critically, tax credits claimed via TRAN-1 or TRAN-2 must not be reported in GSTR-3B to prevent double credit.

To know more about TRAN 1 and TRAN 2 forms, go to – Transition of old input credits to GST regime