Products currently exempt but likely to be taxed under GST - Model GST Law takes care of it

[SKP IDT]

Hope for GST being a reality in April 2017 rekindled with a positive meeting of the Empowered Committee of State Finance Ministers on 14 June 2016. Statement of the Union Finance Minister Mr. Jaitley stating a broad consensus have been built over GST bill and all the States barring one – Tamil Nadu are onboard for implementing GST.

The Model GST Law would act as a broad framework and Central GST as well as State GST Acts would be based on the same. In this article we would like to focus on Section 145 of the Model GST Law which enlists provisions in relation to ‘Credit of eligible duties and taxes in respect of inputs held in stock to be allowed in certain situations’ and evaluate whether the same would open up avenues to claim tax credit which is otherwise unavailable in the current indirect tax regime.

Relevant extract of Section 145 is reproduced below for ease of reference:

“(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.

(2) The amount of credit under sub-section (1) shall be calculated in accordance with generally accepted accounting principles in such manner as may be prescribed.

(3) The amount taken as credit under sub-section (1) shall be recovered as an arrear of tax under this Act from the taxable person if the said amount is found to be recoverable as a result of any proceeding instituted, whether before or after the appointed day, against such person under the earlier law.”

Now, when we decode the aforesaid provision, the following emerges –

1. Eligibility of Input Tax Credit of the following:

Tax Credit of	Pertaining to
Inputs held in stock	Manufacture of goods which are exempt under the current indirect tax regime
Inputs contained in semi-finished or finished goods held in stock

2. Following conditions required to be fulfilled –

1. The inputs/ goods are intended to be used for making taxable supplies under the GST Act;
2. The CENVAT credit on such goods was available to the Company under the current indirect tax regime but the credit could not be claimed as goods of the Company were exempt under the current regime;
3. The Company should be eligible to claim input tax credit under the proposed GST Act;
4. Invoice or other prescribed documents are available with the Company evidencing payment of duty/ tax under the current regime;
5. Such invoices or prescribed documents were issued within 12 months immediately preceding the appointed day of GST Act;
6. The amount of eligible input tax credit shall be computed as per generally accepted accounting principles in manner as may be prescribed.

Companies likely to get benefitted

1. The aforesaid provisions of Section 145 of Model GST law could prove to be of major benefit to the Companies engaged in manufacture of goods which are currently exempt (say Pharma companies engaged in manufacture of medicines or vaccines) and are therefore unable to claim CENVAT credit/ input tax credit of the taxes paid on procurement of inputs.
2. Companies which have opted for concessional duty rate of 2% (subject to non-availment of CENVAT credit on inputs) would also benefit from the said provision.

A look at other transitional provisions

1. Section 143 of the Model Law provides for carry forward of CENVAT credit and VAT credit lying in the balance in the return furnished under the current tax regime to the GST regime. This is a much needed clarity and shall put to rest the numerous questions of industry and other stakeholders on fate of tax credit balance accumulated under current tax regime.
2. A separate Section 144 provides clarity on eligibility of unavailed CENVAT credit on capital goods in the current tax regime under the GST regime. This provision is also a relief as issue of restriction of availment of 50% CENVAT credit in year of purchase of capital goods is addressed.

Still in dark?

Though the Model GST Law has attempted to provide clarity on transitional aspects to a great extent, it is still silent on issue of CENVAT credit accumulated in the current regime on inputs lying in stock which are to be used in manufacture of exempt goods (which are taxable under the current regime). Though the possibility of such a scenario is quite remote, provisions providing express clarity on the same would always be beneficial in uniform interpretation of law.

Way forward

At present, Companies manufacturing exempt products do not capture the details of taxes paid on procurement (as the same is anyways cost to the Company). Therefore, it would be difficult for the Companies to track the actual component of tax in the total product cost in the current tax regime. The ERP systems of most of the Companies may not be developed to capture these details and hence are unlikely to generate reports of taxes paid on procurement.

This aforesaid is a welcome provision; however, it would reap benefits only if an assessee ensures that a proper system is in place to record the taxes paid on procurement.  One-to-one correlation of inputs used for manufacturing process and units lying in stock or in the stock of semi-finished or finished goods is equally important. The taxpayers may have to retain and maintain invoices and supporting documents evidencing payment of taxes on procurement. Thus, the taxpayers may also review the supporting invoices and check for all the prescribed parameters are present on the invoices to claim input tax credit under the GST regime.

Looking at the pace of activities at backend to roll out GST from April 2017, it would not be an overstatement that the government is ahead with GST preparedness than majority of the industry. Therefore, it is high time that businesses evaluate the aforesaid along with other provisions under Model GST law and analyse its positives and negatives well in time to devise a robust GST compliant system within the organization.

 

The article is authored by Shailesh Bang, Anuradha Mantri and Priya Gupta of SKP and the views are personal.