Transitional Provision under GST - Input Tax, Material Returns, Price Adjustments

GST brings in a paradigm shift in indirect taxation, first time in a legislation technology is going to play a significant part and that is where challenge is expected especially for SME sector.  Considering that we have 81 lakhs registered persons which has a significant SME representation, technology will pose a serious challenge. 

This  article purports to unravel some mysteries relating to transition from existing laws to GST, and what needs to be done prior to GST implementation date, so that we do not loose on transition credit.

Chapter XX of Central Goods and Services Act, 2017 deals with Transitional Provisions.  Sections 139 to 142 enact the transitional provisions.  Similar provisions are available in SGST acts of States also.

Transitional provisions are in 4 sections

Section 139 – Moving of existing registered personal in existing laws to GST

Section 140 – Moving of input tax credit (relating to Central Excise & Service tax) to GST

Section 141 – Treatment of job work under new law for goods already moved to Jobworkers

Section 142 – Provisions relating to material returns, pricing, refund, appeals etc which exist under the current law and how they will be treated under GST

In this article we will discuss provisions of Section 140 and some portions of Section 142 (relating to sales returns and pricing).  Explanations are purported to be simple to show a flavour of provisions, for full text of provisions please refer to CGST Act, or send me a message separately.

Section 140(1)

·         A  Registered Person if they do not opt for compounding scheme, as provided in Section 10, can claim the balance of CENVAT Credit & Service tax Credit shown in last returns under existing laws before implementation of GST, as CGST credit. 

·       Similarly under provisions of SGST Act (to be enacted by States) balance of VAT shown in last returns in existing law before implementation of GST, can be claimed as SGST credit.

Section 140(2)

·       A Registered Person if they do not opt for compounding scheme, as provided in Section 10, can claim the unavailed CENVAT credit on capital goods as CGST. 

·        Similarly under provisions of SGST Act (to be enacted by  States), unavailed balance of VAT on Capital goods can be claimed as SGST credit.

Section 140(3)

·        A Registered Person if they manufacture exempted goods or they are a first stage dealer or second stage dealer or a registered importer or a depot of a manufacturer, can claim the tax on closing stock provided (apart from  other conditions)

Ø  They can show the invoice under which the stocks were purchased and this invoice should have excise duty value on it along with evidence of payment of such duty.

Ø  This invoice should be within 12 months of the date of GST implementation. 

·       If the Registered person is not able to provide invoice with excise duty as mentioned above then they will be allowed credit in the below formula

Ø  At the point of sales – provided sales happens within 6 months

Ø  On the sale value 40% of CGST will be given as credit under CGST law.  Meaning a credit of 3.6% under CGST will be available

·         Similarly under provisions of SGST Act (to be enacted by  States), VAT on closing stocks can be claimed as SGST credit subject to similar conditions under CGST.

Section 140(5)

If invoice is raised by vendor prior to GST implementation and material is received after GST implementation then credit of these taxes can be availed under CGST provided the same is accounted within 30 days and proof of this accounting shown.  Extension of time beyond 30 days can be provided by Commissioner in case to case basis.  Similar provision is also available for SGST under State GST Act.

Section 142(1)

For Unregistered person, any material billed before GST implementation to be returned after GST implementation, then

·         this material should have been invoiced maximum 6 months prior to GST implementation

·         Should be returned within 6 months after GST implementation

·         If the above 2 conditions are satisfied then refund will be provided

For Registered Person any material billed before GST implementation to be returned after GST implementation, then the person returning the material should make it as a supply under GST charging CGST / SGST / IGST on those products against which the registered person can claim credit.

Similar provisions will be part of to be enacted State GST acts for VAT

Section 142(2)

Any upward or downward price changes for supplies made before GST implementation should be made through supplementary invoice / debit notes / credit notes and GST to be paid or refunded accordingly.  If refund has to be taken to ensure that the vendor reveres the GST credit before going in for refund.

Procedure for claiming transitional credit

All details should be submitted in eform GST TRAN-1 in GST portal