Transitioning to GST – The Complete Guide

Provisions for Input Tax Credit

Input Tax Credit (ITC) is the mechanism that will allow registered businesses to claim a credit on their tax liability, to the extent of the taxes they have already paid on the inputs they used in producing the goods and services sold.

Certain provisions have been laid out that will allow businesses to carry forward the ITC that was available to them under the previous regime. However, only businesses opting for the regular scheme can avail this ITC, not the ones that opt for the composition scheme.

Below are some of the cases where the provisions that allow ITC to be carried forward will come into effect:

The Closing Balance of Credit for Taxes Paid on Inputs Used in Production

As per this provision, taxpayers are allowed to claim ITC to the extent of the closing balance that is mentioned in their last return filed prior to the implementation of GST.

However, this credit will only be available if the returns have been filed under the previous regime for the 6 months prior to GST implementation i.e. for the period from 1st January 2017 to 30th June 2017.

The government has made a form available for carrying ITC forward, namely TRAN-1. The deadline for taxpayers to file this form is 27th December 2017. However, the Supreme Court allowed taxpayers to make a single revision in their TRAN-1 form between 1st October 2022 and 30th November 2022.

Provisions for Credit of Taxes Paid on Capital Goods

The previous tax regime allowed businesses to claim only up to 50% of the tax paid on purchasing capital goods as input tax credit. The rest of the credit amount had to be carried forward to the next financial year.

For example, in FY 2016-17, if a business had a total credit available of ₹20,000 against the tax paid on the purchase of machinery, they were only allowed to claim ₹10,000 in that year, and the balance ₹10,000 could only be claimed in FY 2017-18.

Businesses will be allowed to carry forward the unutilised ITC to the GST regime. They will need to mention the details of such a credit in form TRAN-1 as mentioned above.

Credit on Goods in Stock

If a manufacturer or service provider has paid the appropriate duties on any goods that they have in their closing stock, they are allowed to claim the credit for the duties paid. They need to make a declaration of such goods in stock on the GST Portal.

There are two main requirements for this:

1. All invoices pertaining to these goods should be available with the manufacturer or service provider.
2. All these invoices should be less than one year old.

If the invoices are not available, then manufacturers and service providers will not be able to claim their due credit under GST. However, traders can still claim the credit, subject to the two conditions mentioned below:

1. The stock must be separately identified
2. The trader must have passed the benefit of such a credit to the final consumer of the goods and/or services.

Availability of Credit if Invoices Cannot be Produced

Persons Registered under GST but Not Under the Previous Regime

The following persons can claim ITC on taxes paid on inputs held in stock as on 1st July 2017:

• Persons who are registered dealers but who were not registered under the previous regime
• Persons engaged in manufacturing of goods that were exempted
• Persons engaged in providing services which were exempted
• Persons who provided works contract services and were availing the resulting abatement
• Persons who were first-stage or second-stage dealers
• Persons who are registered importers

However, all the above persons must fulfill the conditions mentioned below:

• Inputs and/or goods must be used to make only taxable supplies
• The recipient must benefit from these credits as well, through reduced prices
• Only a taxable person can avail input tax credit for these inputs
• The person must have invoices proving that the appropriate duties were paid under the previous regime
• The invoices are less than one year old
• Suppliers of services cannot avail any abatement under the GST regime

Provision for ITC on goods supplied before GST Implementation

If the taxes as per the previous regime have already been paid in full, but the goods are received after the implementation of GST (1st July 2017 being the appointed date), then the recipient is eligible to claim the input tax credit for these goods. But the invoices proving that tax has been paid must be recorded in the books of the recipient, latest by 1st August 2017. If there is sufficient justification for any delay in doing this, a competent authority may grant the recipient an extension of up to 30 days.

Provisions for Other Cases

Provisions for Job Work

As per the GST regulations, no tax is payable on inputs or semi-finished goods that are removed for job work to undergo certain processes and are returned on or after 1st July. However, certain conditions are applicable here, which are as follows:

• The goods must be returned to the factory within 6 months from 1st July (which can be extended for a maximum period of 2 months).
• The goods held by the job worker must be declared in Form TRANS-1.
• If the supply of semi-finished goods is made, it must be done only on payment of tax in India or if these goods are being exported out of India within a period of 6 months starting from 1st July 2017 (the maximum extension allowed is up to 2 more months).

No taxes are applicable if finished goods were removed before 1st July for carrying out certain processes. But, such goods must be returned to the principal within a maximum period of 6 months starting from 1st July 2017.

However, if the goods are not returned within 6 months, input tax credit will be recovered as per the GST provisions.

Provisions for Credit Distributed by an Input Service Distributor

If the service was received before the appointed day, but the pertinent invoices were received afterwards, then the tax that was paid as per the previous regime is eligible to be claimed as ITC under GST. The Input Service Distributor (ISD) shall be able to distribute the input tax credit received under GST.

Provisions for Composition Dealers

Subject to the following conditions, a dealer who was previously paying tax under the composition scheme but is now a normal taxpayer is also allowed to claim the credit available on the appointed day:

• The input is used to produce a taxable supply
• A registered person is eligible to claim ITC as per GST laws
• The dealer possesses the invoices proving that taxes and other duties had been paid
• The invoices are no more than one year old