Understanding the transitional provisions under GST Model Law
With the formation of Goods & Services Tax (GST) Council and its immediate first meeting the Central Government has given clear indications about its commitment to implement the proposed GST law from 1st April, 2017. The trade, industry and professionals have geared up to understand the new law, its provisions and its probable impact. Amidst all these discussions the important point which needs to be discussed at length is the transitional provisions from current indirect tax laws regime to GST regime. The understanding of the transitional provisions is utmost essential for a smooth migration to new regime.
Chapter XXV of the Model GST Law as published by the Ministry of Finance prescribes the transitional provisions under GST. The provisions are important for existing assesees who are registered under various indirect tax laws.Chapter XXV will enable and allow them to decipher and plan its migration from different aspects like registrations, CENVAT credit, and invoicing, pending refund and litigation matters, if any. Important transitional provisions provided under Chapter XXV are discussed below:
- APPOINTED DAY
Section 2 (10) of the Model GST law defines as: “appointed day’’ means the date on which section 1 of this Act comes into effect.
Section 1 provides for a date when the GST Act will come into force. (This date would be the commencement of the GST Law.)
This date would be very important for the assesees as it will be the cut off date from the existing indirect tax regime to GST regime. All the statutory data, information& compliances, as required under various indirect tax laws, would be of paramount importance as only these data, information, figures in statutory compliances as on appointed day would be considered and recognized in the GST regime.
Section 142 of the Model GST law provides for migration of existing tax payers to GST.
The said section specifically provides for the registration process for the persons having registrations under indirect tax laws.
- The existing registrants would be granted provisional registration certificates on appointed day. The said provisional certificate would be valid for 6 months from the date of its issue. The Central / State Government have the authority to extend the period of 6 months based on the recommendation of the Council. Every taxpayer will be allotted a state wise PAN-based 15-digit Goods and Services Taxpayer Identification Number (GSTIN). Various digits in GSTIN will denote the following:
|State Code||PAN||Entity Code||BLANK||Check Digit|
- The person who holds a provisional certificate of registration would be required to furnish certain information as prescribed within prescribed time period. The GST database will require a complete and correct database of the existing registrants. The incomplete and incorrect data from existing registration database to GST database will adversely impact the reports and intelligence derived out of GST database. Hence, certain additional information, which may not be available with the Government, would be sought from the registrants on the recommendations of the GST Council.
- After receipt of the prescribed information, the concerned government authorities would grant fresh certificate of registration. If the assessee to whom the provisional certificate is granted fails to furnish the prescribed information, the registration may be cancelled and the provisional certificate would also be deemed to have not been issued.
Currently the assesees are separately registered with state and/or with central tax administrations or with both depending upon the business activity. In the GST regime, assesee will have to obtain State wise registration(s). Within a state, the assesees have an option to opt for a single registration or multiple registrations for different business verticals situated in same state. The published draft GST Rules for registration brings the further clarity over the procedure.
Relevant forms for associated with registration process under GST:
|1||GST REG-20||Submission of information and documents as specified by the persons getting the provisional registration under the GST act.(Migrants)||Within 6 months from date of issue of provisional registration certificate.|
|2||GST REG-21||Issue of provisional registration certificate and GSTIN to persons registered under existing laws.(Migrants)||Persons registered and having PAN.|
|3||GST REG-22||Cancellation of provisional registration by order If information furnished is not correct and complete.||******|
|4||GST REG-23||Show Cause Notice before cancelling provisional registration.||******|
|5||GST REG-24||Application for cancellation of provisional registration if person registered under earlier laws but not liable to be registered under this Act||******|
- CENVAT CREDIT
- Input/Input Service:
Section 143 of the Model GST Law provides for the amount of CENVAT credit carried forward in a return to be allowed as input tax credit.
This would be the enabling section allowing the assesees to carry forward their closing balance of CENVAT credit under current indirect tax laws regime into GST regime. The credit carried forward would be available as a balance in the electronic credit ledger of the registrant. However, following conditions needs to be considered before carrying forward the said credit:
- The CENVAT credit should qualify as admissible input credit under both, the existing law and the GST law.
- The CENVAT credit must have been reflected as input credit carried forward in the return filed for the last month / period under the existing law.
It’s important to note here that the admissible CENVAT credit as per the last return filled under current indirect tax laws would be considered and recognized. The closing credit balance as per books of account would be immaterial.
Consider following illustration:
On the assumption that the GST would be applicable w.e.f 1stApril, 2017,the amount of CENVAT credit carried forward would be the figures of closing balance of CENVAT credit reflected in the return for the period ending on 31st March, 2017. The hypothetical figures are given in the table below. The eligibility of the credit under GST regime is discussed in column (4) & (5) of below table.
|Various input credit|
|Amount (In Rs.)|
|Credit eligible under GST for supplier of goods?|
|Credit eligible under GST for supplier of service ?|
|1.||Central Excise||3,00,000||Yes-CGST||Yes- CGST|
|2.||Credit under VAT||2,00,000||Yes- SGST||No|
|3.||Service Tax||1,00,000||Yes- CGST||Yes- CGST|
|4.||Krishi Kalyan Cess||5,000||No||Yes- CGST|
|5.||Swacch Bharat Cess||5,000||No||No|
|6.||Additional Duty u/s 3(1) of CTA||80,000||Yes- CGST||Yes- CGST|
|7.||Additional Duty u/s 3(5) of CTA||70,000||Yes- CGST||Yes- CGST|
- Therefore, credit eligible under GST as CGST for supplier of goods will be as follows:
Various input credit
Amount (In Rs.)
|3.||Additional Duty u/s 3(1) of CTA|
|4.||Additional Duty u/s 3(5) of CTA|
- Therefore, credit eligible under GST as SGST for supplier of goods will be as follows:
Various input credit
Amount (In Rs.)
|1.||Credit under VAT|
- Therefore, credit eligible under GST as CGST for supplier of Service will be as follows:
Various input credit
Amount (In Rs.)
|3.||Krishi Kalyan Cess|
|4.||Additional Duty u/s 3(1) of CTA|
|5.||Additional Duty u/s 3(5) of CTA|
(CGST- Central Goods & Service Tax, SGST- State Goods & Service Tax)
Here it is pertinent to note that, the CENVAT credit of CGST components and/or SGST components cannot be cross utilized with or interchanged.
- Capital goods:
Section 144 of the Model GST Law provides for the unavailed CENVAT Credit on capital goods not carried forward in a return, to be allowed in certain circumstances.
In current scenario, as per sub-rule (2) (a) of Rule 4 of the CENVAT Credit Rules, 2004, the only fifty percent of the credit of the duties paid is taken in a financial year. Remaining fifty percent can be taken in subsequent financial year. In case of VAT there are different scenarios like 6 or 12 equated monthly installments, or likewise.
Now the said section 144 enables the assesee to carry forward the unavailed (pending) CENVAT credit on capital goods. The credit carried forward would be available as a balance in the electronic credit ledger of the registrant. The term unavailed CENVAT credit has been defined in an explanation given in sub-section (1) of section 144 of the Model GST Law which is quoted below:
“It means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods by the taxable person under the earlier law from the aggregate amount of CENVAT credit to which the said person was entitled in respect of the said capital goods under the earlier law.”
In view of the same, following credit can be carried forward in GST regime:
The following conditions in relation to ‘capital goods ‘would have to be considered before carrying forward the said credit:
- The CENVAT credit should qualify for eligible input credit under both, the existing law and the GST law.
- The CENVAT credit would be in respect of input credit which is not carried forward in the return filed for the last period under the existing law.
It is necessary to take note of the fact that the CENVAT credit of capital goods forming component of CGST and/or SGST cannot be cross utilized with or interchanged.
- Inputs held in stock:
Section 145 of the Model GST Law provides for the credit of eligible duties and taxes in respect of inputs held in stock to be allowed in certain situations.
There might be a situation where a person is not liable to be registered under the existing law or who is engaged in the manufacture of exempted goods under the existing law but now liable to tax under the GST regime. In such scenario the said section enables the person, now liable to register, entitled to take credit of eligible duties and taxes in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.
The classic cases would be where the assesees are availing a Small Scale Industries (SSI) exemption on account of value of turnover. Current Central Excise law (Notification 08/2003- CE dated 1st March, 2003) provides for an SSI exemption from Central Excise duty for first clearance of goods upto Rupees One hundred & Fifty Lacs. Now in the event of model GST law proposes an exemption of Rupees Ten Lacs then many assesses who are noweligible for an exemption would be covered under the purview of GST. Being covered under GST these said assesees would also be entitled for input tax credit on inputs held in stock.
However, the entitlement to input credit would be subject to following conditions:
- The assessee must be a registered taxable person under the GST law and not under earlier law;
- The assesse must be engaged in an activity which was exempted under the earlier law but now liable to tax under GST law;
- The goods (which goods?) must have been exempted under the state level VAT / CST laws;
- Specified taxes / duties paid on ‘inputs’ would be allowed as transitional credit;
- The inputs should be intended for use in making taxable supplies under the GST law;
- The inputs should be held in stock on the appointed day;
- The goods (held in stock) should have been qualified as inputs under earlier law and should also qualify as eligible inputs under the GST law; and
- The taxable person should be in possession of the relevant documents which should not be older than 12 months from the date of introduction.
Section 150 of the Model GST Law provides for the inputs removed for job work and returned on or after the appointed day.
The said section 150 seeks to provide clarity over the taxability of the inputs removed as such or removed, from factory, after being partially processed sent to a job worker for further processing, testing, repair, reconditioning before the appointed day and received in the factory after the appointed day. In such cases, the model GST law proposes to exempt such inputs if received back in the said factory within 6 months from appointed day.
The exemption comes with a condition that the manufacturer and the job worker has to declare the details of the inputs held in stock by the job worker on behalf of the manufacturer on the appointed day in such form and manner and within such time as may be prescribed. However, if the said inputs are returned by the job worker after a period of 6 months or such extended period (can be extended by the competent authority by upto 2 months) then supply (clearance) of such inputs would be liable taxable and the job worker would GST, as the case may be .If the inputs are not returned within a period of 6 months or such extended period (can be extended by the competent authority by upto 2 months) then the principal manufacturer would be liable to GST.
It’s significant to note here that in the event of exceeding the time limit of 6 months or such extended period the model GST law proposes to tax both the job worker and the principal manufacturer, which might lead to double taxation of a single transaction. The Institute of Chartered Accountants of India in its ‘Suggestions on Model GST Law ’provides that the proposed Section 150 be amended so that GST be collected only once, either from job worker or the manufacturer.
Section 153 of the Model GST Law provides for the issue of supplementary invoices, debit or credit notes where price is revised in pursuance of a contract.
The model GST law envisages a situation of price revision, either upward or downward, for a supply under a contract. In such cases the provision has been made to issue a supplementary invoice, debit note or credit note as the case may be.
- Increase in agreed price:
If, in pursuance of a contract entered into prior to the appointed day, there is an increase in agreed price after the appointed day then the taxable person (supplier of the goods/service) n shall issue a supplementary invoice or a debit note within 30 days from the date of such increase. The supply would be deemed to be taken place in the month in which the supplementary invoice / debit note is issued.
- Decrease in agreed price:
If, in pursuance of a contract entered into prior to the appointed day, there is decrease in agreed price after the appointed day then the taxable person shall issue a supplementary invoice or a credit note within 30 days from the date of such decrease. The supplier of goods would be allowed to reduce the tax liability. However, this reduction in the tax liability would be subject to condition that the recipient of the invoice / credit note also reduces his input credit accordingly.
As there is no clarity on the event of Sales returns, it seems that the supplier can issue a credit note (considering it as decrease in agreed price for invoice) to its customer within 30 days of such return and reduce the outward tax liability proportionately.
REFUNDS OF DUTY/TAX
Section 154 of the Model GST Law provides that the pending refund claims should be disposed of under earlier law.
The assesees are entitled to file various refund claims under existing indirect tax regime, namely, central excise or service tax or VAT / CST. The said section gives a clarity that any refund claim of any duty/tax and interest, if any, paid on such duty/tax or any other amount filled before the appointed day shall be disposed off in accordance with the provisions of such earlier indirect tax laws under which it was filed. Accordingly, the refund would be paid in cash to the assesee and not by credit to any of his electronic credit ledger under GST law.
Attention is invited to the proviso to said section 154 which provides that where any claim for refund is fully or partially rejected, the amount so rejected shall lapse. No provision for appeal is provided for with respect to such refund claims. Hence, assesses need to take utmost care while filling such refund claims.
Illustration: Assuming that the GST will be implemented from 1st April, 2017. Then if refund claim of input Service tax amounting to 10, 00,000/-, was filled under Rule 5 of the Cenvat Credit Rules, 2004 on 25th March, 2017 and not disposed off till 1st April, 2017 then such refund claim would be disposed in accordance with the provision ofRule 5 of the Cenvat Credit Rules, 2004 and Section 11B of the Central Excise Act, 1944. The provisions of GST law would not be applicable for such refund claim. If, out of total refund claim of 10, 00, 000/- refund to the extent of 8,00,000/- is sanctioned then the remaining refund claim of 2,00,000/- would lapse.
- PENDING PROCEEDINGS
- Cenvat credit under proceeding of appeal:
Section 155 of the Model GST Law provides for the Claim of credit to be disposed of under the earlier law.
The section provides for appeal or revision or review or reference, relating to any claim of input tax credit, pending as on appointed day under any of the earlier laws. It provides that same would be dealt and disposed in accordance of the provisions earlier indirect tax laws. The provisions of GST would not be applicable in case of such pending appeal or revision or review or reference. Any amount allowed as input tax credit would be refunded in cash to the assesee. However, if the input credit is disallowed then such amount would become recoverable as an arrear of tax under the GST Act, viz., SGST or CGST, as applicable.
- Proceedings relating to output duty liability:
Section 156 of the Model GST law provides for the Finalization of proceedings relating to output duty liability.
The said section 156 provides for appeal or revision or review or reference, relating to any output duty liability, pending as on appointed day under any of the earlier laws. It provides that same would be dealt and disposed in accordance of the provisions earlier indirect tax laws. The provisions of GST would not be applicable in case of such pending appeal or revision or review or reference. Any amount if recoverable as a result of such appeal, revision, review or reference then the same shall be recovered as an arrear of tax under this act as an arrear of tax under the GST Act, viz., SGST or CGST, as applicable. However, the amount recovered shall not be admissible as input tax credit under the GST law. Sub section 2 of the said Section 156 provides that if any amount found to be admissible to the claimant shall be refunded to him in cash.
Overall the Chapter XXV of the Model GST Law dealing with the transitional provisions endeavors to provide clarity over some peculiar issues which would be important on account of transition from current indirect tax laws to GST law. Its precise comprehension and right application by trade, industry and professionals would be indispensable for avoiding any financial losses and smoother switch from current indirect tax law regime to proposed GST regime.