Transitioning tax credits under GST
Clarity is required for assessees to take necessary steps — in terms of readying supporting documentation where credits can be transitioned, and also negotiating with counterparties on who will bear sunk costs where credits can’t be transitioned
With the goods and services tax (GST) looming, one of the biggest challenges that businesses are grappling with is the transition of existing tax credits. Such credits, once transitioned, can be used to pay GST on outward supplies. Credits that cannot be transitioned become a sunk cost for businesses, given that outward supplies will attract GST at the prescribed rates, but at the same time, a corresponding credit will not be available for offset.
The GST law contemplates two broad scenarios in which credits can be carried forward. The first is a currently registered assessee under the central/state laws, who can transition 100 per cent of the credit shown in his returns. The second is a currently unregistered assessee, who can transition 100 per cent credit for inputs in stock or inputs contained in semi-finished goods/finished goods in stock on the date of transition, on the basis of a duty-paying document issued within one year preceding the GST. Where such document is unavailable, the transition credit is limited to 40 per cent of CGST/SGST paid on the supply of the goods under GST (60 per cent where the collective rate of GST is 18 per cent or more, as in the case of mineral water, computers, cameras etc.). In both scenarios, transition of credits is permitted only in respect of goods/services which satisfy the dual condition of being eligible for credit under the existing rules, as well as being eligible for credit under the GST law.
Industry input on the transition provisions has already resulted in some relaxations — (i) the credit allowance was increased from 40 per cent to 60 per cent where the collective GST rate is 18 per cent or more; (ii) the time limit for declaring transition credits was increased from 60 to 90 days; (iii) traders will also be able to avail of credit basis a Credit Transfer Document (CTD) issued by manufacturers within 30 days of GST for distinctly identifiable goods above ~25,000 (such as televisions, refrigerators, car chassis, engines etc.).
The government must be complimented on having been responsive to the changes that industry has sought. However, certain ambiguities and open issues remain. To begin with, there may be some assessees who fall into a gap between the two credit transition scenarios contemplated under the GST law. For instance, there may be excise-registered manufacturers who pay duty at a concessional rate on the condition that they do not avail of CENVAT (Central Value Added Tax) credits. There is no contemplation of how such persons can carry forward their existing credits, as they do not reflect the credit in their current returns, nor can they transition 100 per cent credits under the second scenario which is available only to unregistered persons.
Another major issue is for traders who had not obtained the optional first stage/second stage dealer registrations under excise (a not uncommon practice in the auto sector, among others). A number of these traders have recently applied for these registrations so that manufacturers can issue them excise invoices to enable a 100 per cent credit transition. Apart from the ground level challenges in obtaining these registrations in time, it is also unclear if traders can transition 100 per cent credits even for stock received by them prior to being granted the dealer registration, presuming that they are able to belatedly obtain a (revised) excise invoice from the manufacturer which the tax authorities accept.
Under the GST law, there is also no provision which speaks to a situation of pending disputes concerning the eligibility of credits under the current law. For instance, an assessee may have received an adjudication order or appellate order (subject to further appeal) ruling against his eligibility to avail of certain credit(s). Similarly, some assessees will have reversed credits under protest under the existing law, or reversed credits to pay mandatory pre-deposits required for filing an appeal. These credits may become available in the future if the outcome of the dispute is favourable to the assessee. The recoverability of such amounts under the GST, either in the form of input tax credit, or by way of refund, is unclear.
Given the proximity to the transition, complete clarity is required for assessees to take necessary steps at this stage — not only in terms of readying supporting documentation where credits can be transitioned, but also negotiating with counterparties on who will bear the sunk cost where credits cannot be transitioned.
The importance of addressing these open issues under the transition provisions is escalated by the fact that there is a single-window opportunity for assessees to properly harvest existing tax credits on the crossover to GST. Concomitantly, the right to credits which are not transitioned as part of this one-time exercise may potentially be extinguished.