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Migrating Input Credit of Current Tax, to GST

Implementation of GST in India from 1st of July, 2017 appears apparent. It is time for businesses to review the accounting and reporting procedures, logistic decisions, procurement, etc for any unwarranted disruption in carrying out business activities post GST. However, there are certain doubts and questions that businesses have for a smooth transition into the new tax regime.

In this post we will focus on how small and medium sized business can prepare themselves to be GST-ready for migration of input credit from the previous tax system to GST. The tax payer should ensure that returns have been filed for all kinds of indirect taxes paid on goods and/or services before the 30th of June 2017, and such goods and services are eligible for input credit under the new GST law.

Credit of Excise Duty

Under the previous tax regime, a trader was not allowed a credit of excise duty or additional customs against excise. But, the GST Council recently amended the transition rules and has now confirmed that, ‘the government will refund 100 per cent excise duty for goods costing above Rs 25,000 and bearing a brand name of the manufacturer and are serially numbered like TV, fridge or car chasis. To avail this, a manufacturer can issue a Credit Transfer Document (CTD) as evidence for excise payment on goods cleared before the introduction of GST to the dealer. The dealer availing credit using CTD would also have to maintain copies of all invoices relating to buying and selling from the manufacturer to the dealer, through intermediate dealers.’ As published by source: TimesOfIndia

The credit transfer document CTD should be issued within 30 days from the day GST is rolled out, and all details related to returns filed should be mentioned in specified forms by manufacturer and such dealers availing the credit.

Situation 1: Availed CENVAT and Input VAT credit

Central Excise

A manufacturer can carry forward the balance of the CENVAT credit available on closing stock before GST is implemented. This ideally means that that closing balance of CENVAT credit must show in the last return filed by the taxpayer. Also, that it should be eligible as input tax credit under the new GST.

As of now, a manufacturer (other than those in small scale industries whose turnover does not exceed Rs. 4 crore) should file their returns on a monthly basis in form ER-1, and SSI quarterly returns in form ER-3. Now, the amount of CENVAT carried forward in these forms on the last day, which means the day before GST is implemented, will be eligible for a carry forward as CGST input tax credit.

For a manufacturersuch as Soham Manufacturers Pvt. Ltd., a two-wheeler manufacturer located in Bangalore and registered under the excise and Karnataka VAT. Consider that on March 1, 2017, Soham Manufacturers Pvt. Ltd has a CENVAT closing balance of Rs 25,000. The question here is if this balance credit can be carried forward? Yes, it can be. This will be allowed if Soham Manufacturers Pvt. Ltd meets two aspects. One that its returns are filed under ER-1 reflect the CENVAT balance. Secondly, the same is allowed as input tax credit in GST. For Soham Manufacturers Pvt. Ltd, this CENVAT will be CGST credit.

For an excise dealer, one is eligible for registration under the Central Excise if one trades in excisable goods. Currently, the excise duty that one pays will not be available as credit. If you are a first stage or a second stage dealer, the duty that is paid is added to the price of the product. For instance if a product is sold to a manufacturer, the duty passed on is liable to be claimed as CENVAT credit by the buying manufacturer. On the date of transitioning to GST, the excise paid in terms of the closing stock held by an excise dealer is allowed to be carried forward as CGST Input Tax Credit.

VAT

A business entity registered under VAT needs to file its returns on a monthly and quarterly basis, depending on the state they work out of. The input VAT credit in the return forms is carried forward as SGST input tax credit.

Let’s again consider Soham Manufacturers Pvt. Ltd as an example. Their VAT Form100 shows credit amount carried forward (as on 31st March, 2017) to be Rs 5,000. This implies that Soham Manufacturers Pvt. Ltd’s input VAT credit balance stands at Rs 5,000. Now, can this be carried forward? The answer is yes, if Soham Manufacturers Pvt. Ltd fulfils some conditions. Firstly, the input VAT of Rs 5,000 must be shown in the returns, and secondly GST approves of the same as input tax credit. If the above mentioned conditions are duly met, the input VAT will be carried forward as SGST credit.

 Service Tax

Currently, a service provider is liable for registration if the aggregate value of taxable services crosses Rs. 10 lakhs. Mentioned below are the type of service tax levied on various services:

  1. Service tax at the rate of 14% is set off against service tax and excise liability.
  2. Swachh Bharat cess at the rate of 0.5%
  3. Krishi Kalyan Cess at the rate of 0.5%; set off against Krishi Kalyan Cess liability.

Now, an input tax credit is available on service tax and on Krishi Kalyan Cess. Such credit is not available on Swachh Bharat Cess. A service provider needs to file his/her half yearly return in Form ST-3. The closing balance of service tax input credit will be carried forward as CGST Input Tax Credit.

Again, taking Soham Manufacturers Pvt. Ltd as an example, let us assume that the company, under ST-3, has disclosed the CENVAT closing balance to be Rs 35,000. Yes, this can be carried forward by the firm if Soham Manufacturers Pvt. Ltd lets the CENVAT closing balance reflect in its return, and also makes sure that the same is eligible under GST.

Situation 2: Unavailed CENVAT credit and Input VAT on Capital Goods

 As of now, under the Central Excise, CENVAT credit must be availed up to 50% in the current year. The remaining must be availed in the subsequent year. In the same way, VAT on purchase of capital goods is not fully available as input VAT immediately. This solely depends on the state VAT laws and also on the type of goods purchased. Such an input VAT can either be availed in various ways like instalments spread over various financial years or as credit after the state of commercial production, etc.

Owing to this prevalent restriction on availing CENVAT credit on capital goods there are chances of some CENVAT and input VAT not having being availed on the date of transition to the new GST regime.

Let’s take Soham Manufacturers Pvt. Ltd as an example. Say, it purchased machinery on 2nd February, 2017 amounting to Rs 1,00,000, and paid an excise duty at the rate of 12.5% and VAT at the rate of 14.5%. The total now becomes Rs 1,28, 813.

As mentioned above, Soham Manufacturers Pvt. Ltd., can avail CENVAT up to 50% in the current year, and rest in following year. And the state VAT provisions say that input VAT credit can be availed after the start of commercial production. Let’s assume that such a production was to start mid-year around June.

Following the conditions stated above, Soham Manufacturers Pvt. Ltd availed:-

  1. 50% CENVAT comes to around Rs 6,250 for 2016-17
  2. Rest of the amount (Rs 6,250) goes to the following year for the firm to avail
  3. Since production starts mid-year, input VAT credit becomes eligible for 2017-18

Now, can all this be carried forward upon a transition to GST? Yes, it can, if  under the current statute, CENVAT and input VAT are allowed as input tax credit, and it is allowed as Input Tax Credit in GST.

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