Moving to GST: Carry forward of input credit held in unsold stock to GST

Moving to GST: Carry forward of input credit held in unsold stock to GST

One of the key things of discussion for most businesses while transiting to GST is the eligibility pertaining to the transfer of input credit held in the closing stock. This is super-critical for businesses, as the rules will determine the amount of input tax credit available on the closing stock, and based on that, businesses will need to re-organise themselves in the last few days of the current taxation regime to manage their inventory effectively.

Transiting rules of carry forward of input credit held in stock can be broadly classified & understood under the following three categories:

1.Rules for businesses which were not liable to registration under the previous law i.e. VAT/Excise/Service tax, but are liable for registration under GST

2.Rules for businesses which were dealing in goods which were exempt under previous law, but taxable under GST

3.Rules for First stage or second stage dealer or an importer

 

1.Rules for businesses which were not liable to registration under the previous law i.e. VAT/Excise/Service tax, but are liable for registration under GST

Here you were running a business and you were not liable to get registered under the previous laws & thus you were paying the taxes on purchase of goods and since you were not registered, you added the taxes to cost of the goods. Now suppose, you are liable for registration under GST, in this case, you would be allowed to take input tax credit lying in the unsold stocks (of raw material, semi-finished & finished goods) held by you.

To avail this credit, you need to meet the following conditions

  • The closing stock of raw material, semi-finished & finished goods must be intended to be used for taxable supplies under GST
  • You must be eligible to take input tax credit on such stock under GST Act.
  • You should be in possession of invoice and/or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs (you must satisfy this condition to be eligible for 100 % credit, otherwise you would be eligible for partial credit which would be discussed later in this article)
  • The date of invoices or any other prescribed duty / tax paying documents is within 12 months from the date of transitioning to GST.

One needs to file Form Tran-1 under GST to avail or transfer input tax credit under, this should be filed within 90 days. Click here to get you Form Tran-1 filled.

Partial credit mechanism- in absence of documentary evidence of payment of tax

100 % input tax credit will be allowed if you have invoice or any other document evidencing tax payment. In the absence of such document, the credit will allowed  below:

  • Goods having GST rate as 18% & 28% would get 60% credit of CGST/SGST and 30 % credit of IGST
  • Goods having GST rate as 5% & 12% would get 40% credit of CGST/SGST and 20 % credit of IGST

2.Rules for businesses which were dealing in goods which were exempt under previous law, but taxable under GST

If you were dealing in goods which were exempt under previous law, you were not eligible to take input credit of taxes paid on purchases made by you. Now, if the goods are not taxable under GST, you would be eligible to take input tax credit lying in the unsold stocks (of raw material, semi-finished & finished goods) held by you.

To avail this credit, you need to meet the same conditions as we discussed in “Rules for businesses which were not liable to registration under the previous law i.e. VAT / Excise/ Service tax, but are liable for registration under GST” (earlier in this article)

One needs to file Form Tran-1 under GST to avail or transfer input tax credit under, this should be filed within 90 days. Click here to get you Form Tran-1 filled.

3.Rules for First stage or second stage dealer or an importer

As a dealer, you were liable for registration under Central Excise if you trade in excisable goods. Earlier, the excise duty you pay was not be available as credit, as a first stage or second stage dealer, you added the excise duty paid to the price of the product. If it was sold to a manufacturer, the excise duty was passed on and this could be claimed as CENVAT credit by the buying manufacturer.

Now, on transitioning to GST, above dealer can avail the Input Tax credit of excise duty on the closing stock held by them.

Let’s illustrate this with an example:

Paras Motors is a dealer in motor car & parts and registered under excise. On 5th June 2017, it purchased motor parts, and the details of transaction are given below:

Suppose as on 30th June 2017, he had 50 Qty of Motor parts in unsold stock

Under earlier law, Paras motor could avail input credit on VAT paid on above purchase, while it was not eligible to excise duty.

Now with GST he is eligible to take input credit of Excise of the closing stock held by him as on 30th June i.e. (18750/100*50= 9375)

So, for 50 unit of unsold stock, Paras motors could transfer the credit to GST & avail it as CGST credit by filing form TRAN-1

To avail this credit, you need to meet the same conditions as we discussed in “Rules for businesses which were not liable to registration under the previous law i.e. VAT / Excise/ Service tax, but are liable for registration under GST” (earlier in this article)

One needs to file Form Tran-1 under GST to avail or transfer input tax credit under, this should be filed within 90 days. Click here to get you Form Tran-1 filled.

 

 

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