The movement from existing regime to GST regime is gaining certainty with passing of each day. The recent council meetings give a sense of hope that the law shall be made effective from July 2017. With GST around the corner, we would like to dwell upon on one of the transitional provisions under the revised model GST law made available in November, 2016. Among the set of transitional provisions, the section which is the subject matter of this article assumes highest significance since it is applicable to majority of the assessees and deals with the transition of credit from existing regimes to the GST regime.
Section 167 of the revised model GST law deals with ‘Amount of Cenvat Credit carried forward in a return to be allowed as input tax credit’. The salient features of Section 167 are discussed as under.
As per Section 167, every person other than who has opted for composition under GST, shall be entitled to take the credit in his electronic credit ledger, the amount of cenvat credit/VAT/Entry Tax carried forward in the returns relating to the period ending with the day immediately preceding the appointed day, furnished, by him under the earlier laws in such manner as may be prescribed. The section has a proviso which states that the credit shall be allowed only if such credit which is being carried forward is eligible also under GST laws.
On a plain reading of the section, it is clear and unambiguous. However, the most disturbing condition is that the credit shall be allowed only if it is carried forward in the returns under the earlier laws. That is to say, for any reason, credit which is eligible under the old laws and GST laws is not shown in the returns under the old laws then such credit shall not form part of the electronic credit ledger under GST except such credit is allowed under any other specific transitional provisions. For example, service provider is eligible to take cenvat credit on capital goods only to the extent of 50% in the first year and the remaining credit can be availed in the next year subject to certain other conditions. However, the service provider while filing the returns for the period ended 30.06.2017 (assuming return will be asked to file) will show only the first 50% credit and the remaining balance will not appear in the returns. In such case, the service provider in the GST regime that is post 01.07.2017 (assuming GST kicks in from July, 2017) can avail the balance credit in light of specific Section 168 which deals with such instances.
In all other cases, where there are no specific sections under the transitional provisions which deal with the movement of credit, then the credit has to be part of the returns under the earlier law, otherwise such credit would lapse. In this article, we shall address certain issues to understand the implications under Section 167.
Issue 1: Our company has eligible credit under the earlier laws. However such credit has been not shown in the VAT/ST/CE returns before the appointed day? Can the company avail credit under the GST laws in the GST returns?
No. On a strict reading of the section, the credit which shall be allowed to carry forward should be from the returns. If the credit even though eligible under GST laws is not shown in the returns furnished under the earlier laws, the same shall not be allowed.
Issue 2: Our company has credits under the service tax law which are eligible, however on reading of the model GST law, such credits are excluded. Shall I be eligible to carry forward such credit?
No. One of the important condition as per Section 167, the credits shall be eligible under the GST laws. Hence, such credit shall not be allowed.
Issue 3: Our company has paid service tax to the vendors for certain services for which credit has been availed. An audit party has stated that such credit is not eligible under the definition of ‘input service’ and asked us to reverse the credit and we have reversed for that period. However, our management has a view that such credit is eligible and decided to avail the same for the subsequent period. What should we do?
Since your company is of the view that credit is eligible under the earlier laws, the same can be shown in ST-3 returns and carried forward to GST regime. If the officer interprets otherwise, he will try to recover and your company can approach the authorities for final view. However, if you fail to mention such credit in ST-3 returns, your company shall permanently forego an opportunity to bring that credit to GST regime even though such credit eligibility issue has been settled in favour of assesses.
Issue 4: Our company has paid service tax under reverse/partial charge mechanism. We are not aware that credit of service tax paid on reverse/partial charge mechanism can be availed and hence missed out in the returns for the period ending Sept 16. Can we take the entire credit pertaining to the period prior to Sept 16 while filing the returns for the period ended March 17?
As per Rule 4(7) of CCR, 2004, the credit can be availed before expiry of one year from the date of documents referred in Rule 9(1), one of which is the challan for reverse/partial charge mechanism instances. Hence, credit pertaining to the period where one year of the challan has not been elapsed can be shown in the returns ending March 17.
Issue 5: We have received an invoice for input service on 31.03.2017. The amount of service tax is Rs 5,00,000/-. We have availed the credit of such service tax in April- 17 on a premise that we will be paying the vendor within 3 months of the date of invoice. However, we have not paid the vendor by 31.06.2017 and such credit has to be reversed in terms of Rule 4(7) of CCR, 2004. We shall pay the vendor in August 17 and in such a scenario, how can the credit be taken in September 17?
The transitional provisions under first model GST law does not cover such a situation. However, the revised model GST law vide Section 197 allows the credit to be taken if the payment is made within three months from the appointed day. Since the payment is made in August, 2017, the credit can be availed under GST laws.
Read Other [Transition issue of Cenvat Credit To GST regime ]
Read Other [Transition issue of Cenvat Credit To GST regime ]
This article is contributed by CA Sri Harsha Vardhan K & CA Manindar K Partners of SBS and Company LLP, Chartered Accountants. The authors can be reached at email@example.com & firstname.lastname@example.org