Transition of Closing Balance of ITC under the present tax regime to GST tax regime.

[Anuj Bansal]

This article is in continuity of the article earlier written by the Author and is published in Tax Management India as regards transition of registration of the dealers under the existing system to GST system.  In short, it was explained in the earlier article that the registration of existing dealers will automatically be converted to registrations under GST law and certain basic details of the dealers will also be inserted in the new registration system except that details which may further be required.

Another important aspect in the transition from the existing system to GST regime is the carryover of closing balance of ITC from present tax regime to GST regime.  It is quite important to understand the process of carryover of closing balance of ITC to GST regime so that full benefit of ITC is available to a dealer. ITC is available  to a dealer under different categories and broadly the categories of situation in which ITC is available or will be available in GST regime are as under. Each of the situations mentioned above are being discussed hereunder in detail:

1. Transition of ITC lying as closing balance on the appointed date to the GST Regime:

In a case where the dealer is already registered under the present VAT law or under Service Tax or Excise Duty, will be eligible to avail his closing balance of ITC as on 31.03.2017 under the existing law against his liability under GST. Section 143 of Model GST Law provides for carryover of existing ITC for the purpose of availment against GST liability. Further it may be stated that as per the Model GST Law, ITC  available under the existing law of Central Government will be carried over to CGST A/c   and ITC available  under the State Laws will be carried over to SGST A/c.

Further, the Model GST Law provides that the ITC shown as closing balance in the last return for the period ending March, 2017 will automatically be carried over in the system for the purpose of CGST or SGST as the case may be. In other words, the amount of ITC to be carried over shown in the return for Service Tax / Excise Duty or for VAT as the case may be shown by a dealer will be automatically taken by the system.

It may be stated once the ITC is carried over in the return of the present law and considered in the first return under GST law, there is no mechanism to correct / revise ITC carried forward from the earlier period. Therefore, the dealer is required to take an extra precaution in filing the last return for the present tax regime and first return for the GST regime. In other words, in case any amount of ITC is left out in the return for the period ending March, 2017, the dealer can only claim cash refund from the department and which would be difficult.

As per the existing provisions of Service Tax / Excise Duty return for the month of March 2017 will be required to be filed by 25^th of April / 10^th of April. Similarly, return for the month of March 2017 under VAT Laws will be required to be filed on dates prescribed in the respective VAT Laws of the State which may vary. Under GST Law, as per the proposed draft first return i.e. for the month of April 2017 will be required to be filed by 20^th May 2017. Since, the amount of carryover of ITC will be taken by the system from the respective return filed by the dealer for the month of March 2017, it is very much important that before the first GST return is filed i.e. by 20^th May 2017, returns under existing laws for the period ending March, 2017 have to be filed and more importantly the returns should show correct amount of ITC available to a dealer which has to be carried over to GST system.  Therefore, it is necessary that all the dealers should be very particular  to file the returns under the existing laws in any case, before  20^th May 2017 and returns should include ITC available to a dealer correctly in respect of all the transactions.

In short, it is stated that the dealer has to be cautious in filing the returns under existing laws for the month of March 2017 claiming the correct amount of ITC   carried over and such returns should be   in any case filed before 20^th May 2017 on which date the returns under GST Law will become due.

2. Transition of closing balance ITC on the appointed date in relation to capital goods:

This situation is relevant in the cases where the assesse has partly claimed ITC on the Capital Goods in the present tax regime and the balance is pending for claim during GST Regime. In such situation, the assessee will determine the total balance ITC on capital goods on the appointed date and he will be allowed to consider the ITC in his first return under GST regime. Here the department has allowed the assessee to manually insert the value of the balance ITC relating to capital goods. It is suggested that the dealer should maintain proper accounts / records of capital goods purchased and ITC available during April 2017. Same shall be supported with copy of invoice and other relevant documents.

3. Transition of ITC on the closing stock of the dealers on the appointed when the dealer is not-registered under the present law regime but registration under GST regime:

There would be category of dealers / manufacturers who are not required to take registration under the present tax regime due to reasons like there turnover does not exceeds the threshold limit or they are dealers in exempted goods. Such kind of dealers may be required to take registration under the GST laws. Such dealers would be entitled to take ITC on the closing stock available with them on the appointed date. But there would be certain conditions in claiming such ITC. Foremost condition is that such kind of ITC was available to the dealer, but ITC is not claimed as he was not liable for registration or was selling exempted goods. It is also stated that the dealer should be in possession of invoices and other prescribed documents evidencing payment of duty/ tax under the earlier law. Therefore, it is suggested in such situations to start preparing / documenting such kind of invoices which would be relevant for claiming ITC on the closing stock.

4.  

Dealers who are registered under the composition scheme under earlier law but under GST regime paying tax as general / normal dealer, the ITC in regard to the stock held by such dealers on the appointed date will be available in GST regime. However, the dealer should be in possession of invoices or any other prescribed documents evidencing the payment of duty / tax.Moreover, the dealer would be eligible for ITC on receipt of such goods under earlier law but for being a composite dealer has not claimed ITC in earlier law. Such kind of ITC shall also be admissible under the GST regime. Therefore, it is suggested that if any such kind of situation is envisaged, proper records of invoices / documents evidencing payment of duty / tax shall be maintained.

There are certain other important conditions which a person is required to follow for claiming the above kind of ITC, under the GST law. Following are the same:

1. The ITC shall be used for making taxable supplies under the GST law.
2. The ITC shall be admissible under GST law.
3. The dealer shall be in possession of invoices and invoices shall not be issued during the period earlier to 12 months preceding the appointed date.  
4. The ITC shall be calculated in accordance to general accounting principles. 
5. The dealer is not paying tax as composition dealer under the GST laws.

If during the GST regime, it is found that dealer has not followed any of the above conditions and has wrongly claimed tax credit, the amount shall be recovered from the dealer as arrear of tax along with interest and relevant penalties.

In the light of above discussion, it is suggested as follows:

1. Take proper care in filing return for the period ending 31.03.2017, as the amount of closing balance of ITC is carried over in the first return under GST.
2. Maintain all documents / invoices for the ITC claimed for the period upto 31.03.2017 to substantiate your claim for ITC.

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Discussions to this article

[Ganeshan Kalyani]

Nice article.

[Ganeshan Kalyani]

In my view sufficient time to file last return under current tax regime should be given. I remember during transition from erstwhile sales tax to VAT the filing of closing stock was required. Based on that credit was allowed. There were so many assessees who had filed incomplete declaration. And they tried to file revised declaration , which welcomed litigation later. This should not be the case in this transition phase from VAT to GST.