CA Parth Shah, Senior Manager at S B Gabhawalla & Co.
Goods & Service Tax is a comprehensive levy to tax supply of goods and services and is expected to be implemented w.e.f 01.04.2017. One of the key reasons behind the shift from the existing tax regime of multiple taxes to a single comprehensive levy of GST is to ensure free flow of credit amongst various taxes, which is not possible under the current regime. For instance, under the current regime, VAT cannot be adjusted against Excise/ Service Tax liability and the same applies in the inverse situation also. The GST law aims to modify this deficit which in many cases also results in cascading effect of taxes.
A dealer is a person who is predominantly engaged in the activity of purchase and sale of goods. The procurement of goods can either be from a manufacturer or trader and from domestic or international markets. The following table highlights the various taxes faced by the dealers on their procurements and the tax inefficiency involved in the current tax regime:
|
Procurement from |
Vendor |
Non Creditable Taxes |
Creditable Taxes |
|
Domestic Market |
Manufacturer |
Excise* |
VAT |
|
|
|
CST |
|
|
|
Trader |
Excise (Hidden Cost) |
VAT |
|
|
|
CST |
|
|
International Market |
Manufacturer/ Trader |
Basic Customs Duty |
SAD |
|
|
|
CVD* |
|
*Under the existing tax regime, the excise duty charged by the manufacturer/ the CVD/SAD paid at the time of import of goods can be transferred to the customer if the dealer is registered as a first stage dealer/ second stage dealer under Central Excise. However, the same has a potential of disclosing the dealers purchase price to the customer which in turn also results in disclosing the margin of the dealer, which the dealers are generally skeptical of doing so.
Under the GST regime, while the above scenario will completely change with only the Basic Custom Duty getting classified under the category of non-creditable taxes, while all the other taxes getting subsumed into GST, either as CGST, SGST or IGST, the credit of which in general will freely flow.
However, this article does not cover what needs to be done for future transactions during the GST, but talks about how to deal with already concluded transactions, for example, stock already in hand as on 31st March 2016, or goods in transit, etc. To summarize, this article talks about how to transition into GST.
Chapter XXV of the model GST law talks in detail about the transition provisions for moving towards GST. Section 145 of the model GST law deals with the provision relating to allowance of claim of credit of eligible duties and taxes in respect of inputs held in stock to be allowed.
The above provision reads as under:
(1) A registered taxable person, who was not liable to be registered under the earlier law or who was engaged in the manufacture of exempted goods under the earlier law but which are liable to tax under this Act, shall be entitled to take, in his electronic credit ledger, 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 subject to the following conditions:
(i) such inputs and / or goods are used or intended to be used for making taxable supplies under this Act;
(ii) the said taxable person was eligible for cenvat credit on receipt of such inputs and/or goods under the earlier law but for his not being liable for registration or the goods remaining exempt under the said law;
(iii) the said taxable person is eligible for input tax credit under this Act;
(iv) the said taxable person is in possession of invoice and/or other prescribed documents evidencing payment of duty / tax under the earlier law in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day; and
(v) such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.
On a plain reading of the section, it appears that the relevant aspects to be analyzed to evaluated the eligibility of credit would be the phrases “not liable to be registered under the earlier law” and “was eligible for cenvat credit” covered under sub-section (1).
Under the current tax regime, the major cost for the dealer is excise duty unless the same is passed on to the customers by way of obtaining first stage/ second stage dealer. Hence, to analyze the first phrase, we will need to visit the basic provisions under the model GST law.
Section 6 of the Central Excise Act, 1944 provides that registration is required to be obtained by any person who is engaged in
(a) Manufacture of excisable goods, i.e., goods specified in the First and Second Schedule to Central Excise Tariff Act
(b) Wholesale purchase or sale or storage of any specified goods included in the First and Second Schedule to the Central Excise Tariff Act
In addition, Rule 9 of Central Excise Rules also provide for every person, who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods to get registered.
Therefore, there is no iota of doubt that every person who deals in excisable products, even if not indulging in manufacturing activity is liable to obtain registration under Central Excise. However, vide notification 36/2001- NT dated 26.06.2001, the CBEC has amended amongst various classes of persons, traders other than those who wish to operate as First Stage/ Second Stage Dealer. To conclude, under the current regime, any person dealing in excisable goods is required to obtain central excise registration, but for the exemption notification.
Having analyzed the phrase “not liable to be registered under the earlier law”, we now move on to analyze the various conditions prescribed under the section which enables a dealer to claim credit of taxes paid on stock in hand as on the transition date:
|
Sr |
Condition |
Analysis |
|
(i). |
Such inputs and / or goods are used or intended to be used for making taxable supplies under this Act;
|
Even under the current tax regime, be it Central Excise or VAT, the provisions of the law are very clear that so far as the output is not liable to tax, no tax relief can be claimed on the corresponding inputs used.
However, this will have an implication if under the existing tax regime, a dealer has a taxable output which is kept outside the purview of tax under the GST regime. In such a case, even if the credit has already been claimed by the dealer before the transition date, it will have to be reversed at the time of carry forward of credit to GST. |
|
(ii). |
The said taxable person was eligible for cenvat credit on receipt of such inputs and/or goods under the earlier law but for his not being liable for registration or the goods remaining exempt under the said law; |
We have already discussed that all dealers who deal in excisable goods are required to obtain registration but for the exemption notification 36/2001. If a dealer opts to not take the benefit of the exemption notification and obtains registration, the question that would arise is whether he would be eligible to claim credit? A detailed analysis of this aspect is done in the subsequent para. |
|
(iii). |
The said taxable person is eligible for input tax credit under this Act; |
Section 2(57) of the model GST law defines the term “input tax” as tax charged on any supply of goods and/or services to be used in the course or furtherance of business.
Therefore, so far as the tax paid inputs held in stock as on transition date are meant for use in the course or furtherance of business, credit can be claimed by the dealer. |
|
(iv). |
The said taxable person is in possession of invoice and/or other prescribed documents evidencing payment of duty / tax under the earlier law in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day; and |
This is a procedural aspect which requires that the dealer be in possession of an invoice evidencing payment of tax on inputs held in stock as on the transition date and the said document should not be more than 12 months old. |
|
(v). |
Such invoices and /or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day. |
Whether a dealer in excisable goods who had opted to obtain registration was eligible to claim credit on receipt of inputs?
Condition (ii) discussed above provides that in order to claim credit of tax paid on stock in hand as on transition date, the taxable person should have been eligible for cenvat credit on receipt of such inputs and/or goods under the earlier law. Therefore, the question that one needs to be answered is had a dealer opted to take registration, i.e., not avail benefit of excise notification, would he have been eligible for CENVAT credit on excise charged on such inputs?
To determine the answer to the said question, one needs to refer to the CENVAT Credit Rules, 2004. Section 2(k) of the CENVAT Credit Rules, 2004 define the term “input” as:
|
(k) “input” means: (i) all goods used in the factory by the manufacturer of the final product; or (ii) any goods, including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for the final products; or (iii) all goods used for generation of electricity or steam or pumping water for captive use |
A dealer dealing in excisable goods is not going to use the goods in the manufacture of final product, he is merely acting as a re-seller. Therefore, the goods purchased by a registered dealer for trading purposes would not get covered under this entry |
|
(iv) all goods used for providing any output service |
Rule 2(p) of the CENVAT Credit Rules, 2004 define the term output service to exclude services specified in section 66D of the Finance Act, 1994. Under the current tax regime, trading in goods as an activity is covered under the negative list of services u/s 66D. Therefore, the goods cannot be classified even under this entry. |
|
(v) all capital goods which have a value upto ten thousand rupees per piece |
Not relevant hence not discussed. |
|
but excludes (A) to (F) --- not reproduced as not relevant Explanation ---- not reproduced as not relevant |
|
Ongoing through the above definition of inputs and the analysis, it appears that a dealer who is engaged in trading activity is not entitled to avail credit of tax paid on inputs, even if he has opted to obtain registration (not opted for the exemption benefit).
The CBEC has issued a FAQ on model GST law wherein various aspects of the model GST law have been covered.
For the aspect of “not liable to be registered under the earlier law”, the FAQ provides as under:
Q 5. Give two examples of registered taxable persons who were not liable to be registered under the earlier law but are required to be registered under GST?
Ans. A manufacturer having a turnover of say Rs 60 lakhs was enjoying SSI exemption earlier, will have to be registered in GST as the said turnover exceeds the basic threshold of Rs 10 lakhs - section 9.
A trader having turnover below the threshold under VAT making sales through e-commerce operator will be required to be registered in GST. There will no threshold for such persons – section 145 read with section 9 and Schedule III.
Ongoing through the above, while it may appear that intention of the law is to allow the credit of tax paid on stock held in hand as on transition date, the way the law has currently been drafted, it appears that the claim of credit might be challenged for the simple reason that a dealer was not eligible to claim credit under the existing tax regime whether or not he had opted for registration. Further, even the FAQ is silent on this aspect. It merely brushes through the concept of “not liable to be registered under the earlier law” but does not with the issue of credit eligibility.
This aspect of transition will have industry wise wide ramifications and therefore, it would be prudent to obtain clarification as well as make appropriate representations before the concerned law makers to reflect this point, if required.
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