Transitional Provisions

In order to ensure a smooth transition and to keep such challenges at the bare minimum, the GST Laws provide for various provisions relating to transition. Such provisions are enshrined in Chapter XX of the CGST Act. More or less similar provisions are contained in the SGST Laws as well. In view of section 20 of the IGST Act, the transitional provisions of CGST Act would apply to IGST Act as well.

Summary of the Transitional Provisions

The following table provides a bird’s eye view of the statutory provisions dealing with transition from existing laws to the GST Laws.

Broadly, the provisions relating to transition can be divided into provisions dealing with output taxes, provisions dealing with input credits and procedural matters.

Repeal and Savings

Section 174 of the CGST Act repeals various existing laws from the date of commencement of the Act. At the same time, it is also provided that the repeal of the said laws shall not impact certain proceedings, rights and obligations already accrued under the existing laws. Further, it is also stated that the general application of section 6 of the General Clauses Act, 1897 is not impacted due to section 174.

The proviso to section 174(2)(c) specifies that any tax exemption granted as an incentive against investment shall not be treated as a privilege and accordingly, the savings clause shall not apply. In the case of Shrijee Sales Corporation vs. Union of India 1997 (89) E.L.T. 452 (S.C.), the Supreme Court held that though the principle of promissory estoppel is applicable against Government, in case of supervening public equity, the Government is allowed to change its stand and can withdraw a time-bound exemption notification prior to its expiry.

The above proviso and the decision may become very relevant in understanding situations where long-term exemptions provided for investment in backward areas have already been granted under the existing laws and not continued under the GST Law.

While the GST Law provides for repeal of the existing laws, it does not explicitly contain any provision for extinguishing the liability already created under the existing laws. This would imply that in cases where the taxable event is under the existing law, the liability to pay tax continues under the existing law and is not exhausted by payment of tax under the GST Law.

Transitional provisions relating to registration

Section 22(2) provides that, every person who was registered under any of the existing law is required to get himself registered under the GST Act. If however, such person is no longer liable to get himself registered under GST, he may subsequently apply for surrender of registration within a prescribed period, as per the provisions contained in GST Act, in which case it shall be deemed that no registration certificate is issued right since beginning. The process of applying for the GST registration, based on the existing registration no. under the earlier laws is commonly known as ‘migration’. The applicant needs to mention, details of all previous registration number held by him under the existing law in the application form. This appears to be necessary, for non-mentioning the same will create procedural difficulty in claiming transitional benefits contained in section 140 of the Act.

Transitional arrangements in respect of input tax credit Section 140 deals with various situations where transitional arrangements are made for claim of credit. In order to avail the benefit of transitional credits, the applicant is required to furnish his claim in Form TRAN-1, TRAN-2 and/or as the case may be TRAN-3. The essence of the said provisions is covered in subsequent paragraphs.

Section 140(1) permits a registered person to claim the CENVAT Credit carried forward in the last return under the existing law. The Credit can be carried forward subject to certain conditions, one of which is filing of all the returns required to be filed under existing law for the period January 2017 to June 2017. Section 142(9) specifically deals with situations of revised returns and states that any increase in CENVAT Credit consequent to a revised return will not be carried forward under GST, but be eligible for cash refund under the existing law. Will this beneficial provision permit a back door entitlement for entities accumulating substantial CENVAT Credits and unable to utilise the same? Similarly, the unutilised input tax credit disclosed in the VAT Returns can be carried forward subject to certain conditions, one of which pertains to receipt of all pending declarations.

The declaration for the purpose of claiming transitional credit u/s. 140(1) is required to be given in Tables 4 and 5 of Form TRAN-1. Table 5(a) pertains to transitional credit of eligible duties under Central Laws and Tables 5(b) and (c) relates to claim of transitional credit under State VAT laws. Table 5(b) requires the applicant to give details of statutory forms received for which credit is being carried forward for the period 1st April, 2015 to 30th June, 2017. Table 5(c) requires the applicant to disclose turnover for which forms are pending and differential tax liability thereon. Any credit reversal made in relation to such transaction under existing law shall be disclosed and added back in column 7 of the said Table. If claim of credit as per last return disclosed in Column 2 of the said Table is lesser than sum of net differential tax liability as computed in Column (10), no credit shall be allowed to be carried forward and the applicant may then file refund claim under the existing law in accordance with CST Rules. Further, Table 45(b) needs to be filed only if the applicant is going to claim benefit of 
transitional credit u/s. 140(1) of the State GST Acts and not in other cases.

Section 140(2) permits the claim of unavailed credit on capital goods in cases where the credit under the existing laws is available in instalments. A declaration for the same is required to be given in Table 6 of TRAN-1.

Section 140(3) is an important provision permitting the claim of credit of eligible duties 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 various conditions mentioned therein. The credit is available to a registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer.

It may be noted that one of the important conditions for the claim of credit is that the said registered person is in possession of invoice evidencing payment of duty under the existing law in respect of such and that such invoice is issued not earlier than twelve months immediately preceding the appointed day. Further, section 140(3) does not cover ‘capital goods’. The applicant desiring to take benefit of transitional credits under this section are required to furnish declaration at Table 7 in Form TRAN-1 giving details of inputs held in stock and inputs contained in semi-finished or finished goods held in stock. There are certain ambiguities about the applicability of this provision to builders and developers, since in such case, stock is of immovable property.

In cases where the person is not in possession of a duty paying document, a proportionate credit linked to the output tax liability (“deemed credit”) under the CGST Act has been prescribed through the Transitional Rules. Such deemed credit is allowed as under:

For benefit of deemed credit under the State GST Laws, respective laws may be referred to.

Such benefit is not applicable to manufacturers or supplier of services. Any person exercising the option of deemed credit is required to furnish a declaration in respect of stock of goods not supported by invoices/documents evidencing payment of tax, in Table 7(d) of Form TRAN-1. Such credit shall be made available to the applicant only after the tax payable on output supply is paid. The deemed credit can be claimed only up to 6 tax periods after the appointed date. The applicant is required to file Form TRAN-2 at the end of each of the six tax periods in order to claim the credit.

Similarly, in certain cases, the manufacturer is permitted to issue a Credit Transfer Document to enable the person possessing the goods to claim the credit on the basis of such document. The applicant is required to file declaration in Form TRAN-3 in such case.

Provisions similar to section 140(3) are contained in section 140(4) and section 140(6). Section 140(4) is combination of sections 140(1) and 140(3). Section 140(6) is applicable when registered person was paying tax at fixed rate, or paying a fixed amount in lieu of tax payable under existing law (i.e. composition amount). Purpose of this section appears to cover cases, where the assessee has availed benefit of special scheme, where although tax has been paid under existing law, the corresponding credit was not allowed to him under the earlier law. The benefit of ‘deemed credit’ as contained in section 140(3) is however not applicable in case of section 140(6). Reporting in respect of claims under these sections is required to be made in Table 7 of Form TRAN-1.

Section 140(5) permits a credit of eligible duties and taxes in respect of inputs or input services received after the appointed date if the said transactions are recorded in books of account within 30 days from the appointed date. It essentially covers a case, where the tax has been paid under the earlier law, but credit could not be availed in existing law actual supply is received on or after 1-7-2017. Section 140(7) permits input service distributor to distribute credit in respect of input services received before the appointed day, even if invoice relating to such services are received after the appointed date. Such cases are required to be reported in Table 7(b) of Form TRAN-1.

Section 140(8) provides that, a person having centralised registration under existing law, shall be allowed to take in his electronic credit ledger, credit of the amount of CENVAT carried forward in a return, for the period prior to 1-7-2017. However, it appears that, for claiming the credit such person needs to file his return for the period ending 30-6-2017, within a period of 3 months from the appointed date. For the purpose of carry forward, the claim of credit as per original return shall be considered and the claim of credit as per revised shall be considered only if credit claimed in revised return is lesser than that in original return. In other words, if in revised return higher credit is claimed, carry forward of such higher credit may not be allowed.

Section 140(9) permits recredit of service tax credit already reversed under the existing law on account of non-payment to vendors. The said recredit will be available if the value and the tax is paid to the vendor within 3 months from the appointed date.

Other Tranistional provisions – Section 142

Section 142(1) deals with a case where goods supplied to any person before 1-7-2017 are returned by such person after the said date. If such goods are returned by a person who has obtained registration under the GST law, such person returning goods shall be required to issue invoice and charge GST on such supply of goods returned. If such goods are returned by unregistered persons, then a person who had supplied the goods before 1-7-2017, shall be entitled to take refund of taxes paid under the earlier laws on such supply, provided the goods were sent within 6 months prior to appointed date and returned within 6 months after the appointed date and that such goods are identifiable to the satisfaction of proper officer. Similar provision is contained in section 142(12) in respect of goods sent on approval basis, to the effect that, if such goods are sent 6 months before the appointed date, and are rejected or not approved by the buyer and returned to seller within 6 months after the appointed date, then no liability under GST or as the case may be earlier law would arise in such case.

It is likely that for a supply effected in the pre-GST regime, there could be some variation in the value of taxable service or value of goods on account of discount, etc. In such cases, since the taxable event was under the existing law, the differential tax should be payable under the existing law. However, as a transition provision, Section 142(2) permits the issuance of a debit/credit note under the GST Regime and such debit/ credit note is deemed to have been issued in respect of an outward supply under the GST Regime. This provision permits an adjustment on account of GST for supplies which initially attracted VAT/Excise Duty/Service Tax. Though no corresponding amendment is carried out under the existing laws to insulate against the liability for the said debit notes, it can be said that section 142(2) will have an overriding effect over the provisions of the existing laws.

A downward adjustment of tax consequent to the issuance of a credit note is permitted u/s. 142(2)(b) only subject to a corresponding reduction of input tax credit by the recipient. In cases where the recipient was not eligible for input tax credit under the existing laws, it is very likely that he will not agree for such a reduction in his input tax credit. In such situations, will it be open for the supplier to disregard the provisions of section 142(2)(b) of the CGST Act and invoke the provisions of Rule 6(3) of the Service Tax Rules, 1994 and file a consequent refund claim? In view of the legal principles enunciated, it is felt that such an approach may be feasible.

Sections 142(3), (4) & ( 5) deals with refund provisions and provides that refund if any shall be paid in cash, and that if such claim of refund is fully or partially rejected, the amount so rejected shall lapse.

Sections 142(6) & (7) deals with proceedings of appeal, review and reference relating to claim of CENVAT credit and output duty and tax liability. Section 142(8) deals with recovery of amount pursuant to assessment or adjudication proceedings, under the existing law.

Section 142(9) covers the impact of revision in returns resulting into amount recoverable or amount refundable under the existing laws.

Services provided before the appointed date but POT arises under the GST Regime

Rule 3 of the Point of Taxation Rules, 2011 defines the point of taxation to be the date of issuance of invoice if the same is issued within 30 days from the date of completion of service. A testing agency issues a certificate of quality on 26th June 2017 and issues an invoice on 2nd July 2017. In view of the principles illustrated above, the testing agency will be required to discharge service tax on the said transaction since the taxable event of rendition of service is completed when the levy of service tax was in force. Section 142(10) of the CGST Act will not come to the rescue of the agency since the said provision applies only for supplies after the appointed date. Of course, section 140(5) of the CGST Act will permit the credit of the service tax to the recipient if the transaction is recorded in his books of account before 30th July 2017. For the said purpose, the phrase “services received on or after the appointed date” will have to be read as “invoices received on or after the appointed date” to make the provision operational.

A construction contractor provides a continuous service to his clients. In view of the proviso to Rule 3 of the Point of Taxation Rules, 2011, each event which requires the receiver of service to make any payment to service provider (‘payment milestone’) is deemed to be completion of the service to that extent. In a particular instance, the construction contractor may have performed partial work but the milestone may not be triggered on 30th June 2017. In such situations, since the deemed completion of service is not triggered at all, the levy does not crystallise in the service tax regime and the construction contractor may bill under the GST law with applicable GST. This would also be in alignment with the provisions of section 142(10) of the CGST Act.

A manufacturing company avails the services of an advocate on 2nd June, 2017. The said services are covered under reverse charge mechanism under the Service Tax Law. The payment to the advocate is made on 12th August, 2017. Rule 7 of the Point of Taxation Rules, 2011 defines the point of taxation in case of reverse charge mechanism to be the date of payment if the payment is made within three months from the date of invoice. In this case, since the services were rendered in June, the liability to pay service tax arises. The said liability is payable for the month of August 2017 and needs to be discharged by 6th September 2017. Unluckily, there is no provision permitting the credit of such service tax paid. The applicability of fourth proviso to Rule 7 of POT Rules may be required to be examined in this case.

In case of import of services, section 21 of the IGST Act becomes relevant. The said provision requires the payment of GST for import of services made after the appointed date regardless of whether the transaction had been initiated before the appointed date. However, the term ‘import of services made’ has not been defined and therefore the interpretation of the said term may result in litigation.

POT exhausted under the existing laws, but supplies made after the appointed date

A converse situation can arise in the context of goods and services where advances are received or invoices are raised prior to 30th June, 2017 but the actual supply happens under the GST Regime. In such situations, the correct trigger point of taxation would be GST and not the existing tax requiring the assessee to file a refund claim for the existing tax and further liability towards payment of GST under the GST Law. However, in order to ease the process, Section 142(11) provides for a transitional benefit under the GST Law.

Section 142(11)(a) states that no tax shall be payable on goods under the GST Act to the extent that the tax was leviable under the VAT Act of that State. Similarly, Section 142(11)(b) states that no tax shall be payable on services under the GST Act to the extent that the tax was leviable under the service tax law.

Section 142(11)(c) further states that where tax was paid on any supply both under the Value Added Tax Act and under the Service Tax Law, GST shall be payable to the extent of supplies made after the appointed day and the taxable person shall be entitled to take credit of value added tax or service tax paid earlier.