Understanding GST Transition Rules for Specific Scenarios
This article clarifies how specific scenarios like works contracts, continuous supplies, Input Service Distributor (ISD) credit, and agent-held goods are handled during the GST transition. It explains how tax liability and input tax credit claims are determined when supplies or payments straddle the pre- and post-GST periods. The piece also emphasizes the role of prior tax payments and specific forms like FORM GST TRAN-1 in ensuring a smooth transition.
The introduction of GST on July 1, 2017, marked a significant change in India's tax landscape. Many businesses expressed concerns about the shift from the previous VAT/excise system to the new GST framework. This article examines specific transitional provisions under GST.
Impact of GST on Long-Term Construction and Works Contracts
Any goods or services provided after the GST implementation date, under a works contract that was agreed upon before this date, will be subject to GST.
Case 1: For instance, if Mr. B contracted Care Constructions Ltd. on June 1, 2017, for an office building, and Care Constructions supplied materials and services on June 20, 2017, with payment received on June 25, 2017, GST will not be applicable. This is because the supply occurred before the GST effective date.
Case 2: However, if Care Constructions Ltd. provided goods on July 15, 2017, GST would apply, even if the contract was established prior to the GST rollout, as the supply happened post-implementation.
Case 3: In another scenario, if Care Constructions supplied materials and services on June 20, 2017, and issued an invoice on the same day, but received payment on July 27, 2017, GST would not be applicable. The supply took place before GST, and the time of supply (invoice date) also predates GST implementation.
GST Transition Rules for Works Contracts
Works contracts involve both goods (like iron bars and cement) and services (such as labor and engineering), traditionally attracting both service tax and VAT. Input Tax Credit (ITC) can be claimed proportionally for supplies where VAT or service tax was paid before the GST effective date, even if the actual supply occurs after. Taxpayers must electronically file a declaration in FORM GST TRAN-1, providing these details within ninety days of the appointed day.
Example: Consider Care Constructions receiving an advance payment and issuing an invoice on June 27 for building a blast furnace for XYZ Ltd., with materials and services supplied on July 5, 2017. GST will not apply because the invoice was issued before the GST implementation date. Additionally, XYZ Ltd. can claim ITC on the July 5 supply if it submits the FORM GST TRAN-1 declaration electronically within 90 days from July 1.
Rules for Continuous or Periodic Supply of Goods and Services
For ongoing supplies of goods or services, GST will not be levied on deliveries made after the GST effective date if payment was received and taxes were already settled under the previous tax regime before the appointed day. This applies regardless of whether the payment was full or partial.
Case 1: For example, if Mr. S provides goods continuously to Mr. B, and on July 15, sends goods valued at Rs. 1,00,000, for which Mr. B made an advance payment on June 27, GST will not apply. This is because payment was received, and tax was paid under the old law before GST implementation.
Case 2: In a similar situation, if Mr. B had only paid Rs. 50,000 as an advance in June, GST would still not be applicable. The principle remains that if tax was paid under the prior law, the extent of the advance payment is irrelevant.
Case 3: If Mr. B completes the full payment of Rs. 1,00,000 on July 17, GST would typically apply because the consideration is received post-GST implementation. However, an exception exists if the corresponding tax had already been paid under the previous tax laws.
Input Service Distributor's Entitlement to Service Tax Credit
An Input Service Distributor (ISD) can claim Input Tax Credit (ITC) for services received before GST was implemented. This credit is eligible for distribution under the GST regime, regardless of whether the invoices for these services were received before or after the GST effective date. This specific provision supersedes general GST rules concerning the time of supply for services.
For instance, if ABC Ltd., a head office with three branches, received services worth Rs. 1,00,000 on June 25, and the invoice arrived on July 5, ABC Ltd. is permitted to distribute this Rs. 1,00,000 as credit under GST. This amount will not be considered a carried-forward credit from the old regime.
Claiming VAT Credit on Goods Held by Agents
Agents can claim Input Tax Credit (ITC) for VAT paid on goods belonging to their principal, which are in their possession on the GST implementation date, provided certain conditions are met:
- The agent must be registered under GST.
- The principal must electronically declare the stock details held by the agent on June 30, 2017, in FORM GST TRAN-1, submitted within 60 days of the appointed day.
- The invoices for these goods must not be older than 12 months as of the day before the appointed day.
- The principal must not have claimed or must have reversed any input tax credit on these specific goods.
These rules apply to both regular saleable goods and capital goods.