For Registered Businesses

The first and foremost task for you, as a business registered under the current law, is transiting to GST. While it is important to know the fundamentals of GST, it is also very critical for you to understand GST transition provisions available, and take the necessary actions to ensure a smooth transition to GST and leverage on transition benefits. You will need to review your accounting and reporting procedures, procurement, logistic decisions, and so on in advance to avail the appropriate GST input tax credit.

Today, the manufacturing, sales and service activity are governed by a separate indirect tax system. The manufacturing activity is covered by Central Excise, sales is covered under State VAT/CST, and the services activity is covered under the Service Tax Act.

For better and ease of understanding, we have categorised the transition provisions for each of the below tax types:

  • Central Excise
  • VAT
  • Service Tax

Some questions you may have:

  • What will happen to the balance input tax credit available on the last day, before GST to be implemented?
  • What will happen to the input tax credit on capital goods which is yet be availed?

We will answer these questions scenario-wise.

Scenario 1: Availed CENVAT and Input VAT Credit

Central Excise

Manufacturer

A manufacturer can carry forward the balance CENVAT credit available on the last day, prior to date on which GST is implemented, as input credit.

What does this mean?

  • The closing balance of CENVAT credit should reflect in the last return filed by you, and
  • It should be allowed as input tax credit under GST

Today, a manufacturer other than the Small Scale Industries (SSI- whose turnover does not exceed 4 crores) should file their monthly returns in Form ER-1, and SSI quarterly returns in Form ER-3. The amount of CENVAT carried forward in Form ER-1 or Form ER-3 as on the last day i.e., the day before GST is implemented will be allowed to be carried forward as CGST input tax credit.

Let’s understand this with an example

Super Cars Pvt Ltd, a car manufacturer located in Karnataka is registered under Excise and Karnataka VAT. As on 31st March, 2017, the Form ER-1 of Super Cars Pvt Ltd is as given below:

FORM E.R.-1
RETURN OF EXCISEABLE GOODS AND AVAILMENT OF CENVAT CREDIT FOR THE MONTH OF MARCH AND YEAR 2017
DETAILS OF CREDIT
CENVAT
AED_TTA
NCCD
ADE_LVD_CL_85
ADC_LVD_CT_75
EDU_CESS
SEC_EDU_CESS
SERVICE_TAX
EDU_CESSST
SEC_EDU_CESS_ST
Closing Balance 25,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

As per Form ER-1 of March 2017, Super Cars Pvt Ltd has a closing CENVAT balance of Rs 25,000.

Can Super Cars Pvt Ltd. carry forward the CENVAT credit?

Yes, the closing CENVAT balance of Rs 25,000 is fully eligible to be carried forward by Super Cars Ltd. This is because Super Cars Pvt Ltd satisfies all the conditions explained below:

  • The CENVAT of Rs 25,000 should reflect in the return, and
  • In GST, the same is allowed as Input Tax Credit.

Now, for Super Cars Pvt Ltd, CENVAT will be a CGST credit. This can be utilized to set-off the liabilities in the order prescribed.

Excise Dealer

As a dealer, you are liable for registration under Central Excise if you trade in excisable goods. Today, the excise duty you pay will not be available as credit. As a first stage or second stage dealer, the excise duty paid get s added to the price of the product. If it is sold to a manufacturer, the excise duty passed on will be claimed as CENVAT credit by the buying manufacturer.

On the date of transitioning to GST, the excise duty paid in respect of closing stock held by you, will be allowed to be carry forward as CGST Input Tax credit.

VAT

A business registered under VAT needs to file monthly or quarterly VAT return forms, as prescribed by their respective states. The input VAT credit in VAT return forms will be carried forward as SGST input tax credit.

Let’s understand this with an example

Super Cars Pvt Ltd, a car manufacturer located in Karnataka is registered under Karnataka VAT. As on 31st March, 2017, the VAT Form 100 (monthly return form for Karnataka) of Super Cars Pvt Ltd is as given below:

Form VAT 100 (See rule 138)
RETURN
Tax period (month/quarter) March, 2017
Credit/excess payment carried forward 5,000.00

As per the VAT Form 100 of March 2017, Super Cars Pvt Ltd has an input VAT credit balance of Rs 5,000.


Can Super Cars Pvt Ltd
. carry forward the input VAT credit?

Yes, the closing input VAT of Rs. 5,000 can be fully carried forward   by Super Cars Pvt Ltd. This is because Super Cars Pvt Ltd. satisfies all the conditions explained below:

  • The input VAT of 5,000 is reflected in the return, and
  • In GST, the same is allowed as Input Tax Credit.

Now, for Super Cars Pvt Ltd, the input VAT will be carried forwarded as SGST credit. This can be utilized to set-off the liabilities in the order prescribed.

Service Tax

Today, a service provider is liable for registration, if his aggregate value of taxable services exceeds 10 lakhs. The following are type of service tax levied on the taxable services:

Tax Rate of Tax Input Credit Available? Set off Against?
Service Tax 14%                   Yes Service Tax and Excise Liability
Swachh Bharat Cess 0.5% No
Krishi Kalyan Cess 0.5% Yes Only Against Krishi Kalyan Cess liability

 

As a service provider, you need to file half yearly return in Form ST-3. The closing balance of service tax input credit will be carried forward as CGST Input Tax credit.

Let us understand this with an example.

Super Cars Ltd is a car manufacturing unit in Karnataka. They also have service units located in Karnataka. As on 31st March, 2017, ST-3 return form of Super cars Ltd is given below:

As per Form ST-3 of March 2017, Super Cars Pvt Ltd has a closing CENVAT (Service Tax Input Credit) balance of Rs 30,000.

Can Super Cars Pvt Ltd carry forward the CENVAT credit?

Yes, the closing CENVAT balance of Rs. 30,000 is fully eligible to be carried forward by Super Cars Pvt Ltd. This is because Super Cars Pvt Ltd. satisfies all the conditions explained below:

  • The CENVAT of Rs 30,000 is reflected in the return and
  • In GST, the same is allowed as Input Tax Credit.

Now, for Super Cars Pvt Ltd, CENVAT will be a CGST credit. This can be utilized to set-off the liabilities in the order prescribed.

Scenario 2: Unavailed CENVAT credit and Input VAT on capital goods

Currently, under Central Excise, CENVAT credit should be availed to the extent of 50% in the current year, and the remaining should be availed in the subsequent year. Similarly, VAT paid on purchase of capital goods will not be fully available as Input VAT immediately. Depending upon the state VAT laws, and the type of capital goods purchased, the Input VAT can be availed,

  • In installments spread over different financial years
  • As credit after commencement of commercial production and so on.

Due to this prevailing restriction for availing CENVAT credit on capital goods, there could be some unavailed CENVAT and Input VAT on the date of transitioning to GST.

Let us discuss with an example to understand better

Super Cars Pvt Ltd purchased machinery on the 1st February, 2017. The details of the transaction are shown below:

Particulars Amount (Rs)
Machinery 1,00,000
Excise Duty@12.5% 12,500
VAT 14.5% 16,313
Total 1,28,813

As per the current CENVAT provisions, Super Cars Pvt Ltd is allowed to avail CENVAT up to 50% in the current year, and the remaining during the subsequent years. And according to the VAT provisions of Karnataka, input VAT credit can be availed only after commencement of commercial production. Let’s assume that commercial production was to begin in the month of June’17.

Considering the scenario – Super Cars Pvt Ltd availed

  • 50% CENVAT i.e. Rs 6,250 in the current year (2016-17).
  • Remaining CENVAT of Rs 6,250 in the subsequent year (2017-18).
  • Input VAT credit after commencement of commercial production, eligible in 2017-18.

Will Super Cars Ltd. be allowed to carry forward the unavailed CENVAT of Rs 6,250 and input VAT credit of Rs 16,313 on transition to GST?

Yes, Super Cars Ltd.is allowed to carry forward the unavailed CENVAT credit on capital goods, provided these conditions are satisfied:

  • Under the current statute, CENVAT and input VAT are allowed as input tax credit.
  • It is admissible as input tax credit in GST.

Super Cars Pvt Ltd satisfies all the conditions, and they are eligible to carry forward the CENVAT and input VAT credit.

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