With only a few days to go for GST to be rolled out, one of the key points of interest for most businesses are the transition rules and provisions, especially pertaining to the closing stock being held on the transition date. This is super-critical for businesses, as the rules will determine the amount of input tax credit available on the closing stock, and based on that, businesses will need to re-organise themselves in the last few days of the current taxation regime to manage their inventory effectively.

The main concern

A crucial case in point is the input tax credit on the closing stock for those dealers who have not registered under the current law but are eligible for input tax credit (ITC). As per the Transition Rules, those dealers who have purchased excisable goods, directly from the manufacturer / 1st stage dealer / 2nd stage dealer – will be eligible to get 100% credit of the excise paid on closing stock. On the other hand, those dealers, who have purchased excisable goods, but from wholesalers – who pass on the excise component as cost – will be eligible to get only part of the credit, when they sell the goods post GST – 60% in case the GST rate is 18% or more, and 40% in case the GST rate is 12% or less.

Also Read: Migrating to GST for registered businesses

Let’s understand these two cases in detail.

Case 1

AT registered dealer making purchase of excisable goods directly from manufacturer / 1st stage dealer / 2nd stage dealer and has invoice evidencing duty payment

Let us consider a dealer Shiva Enterprises buying a product from a manufacturer Kuntala Industries on 15th of June 2017. The invoice will look as follows –

Cost                           =     1000.00 INR

Excise @ 12.5%       =     125.00 INR

Cost with Excise      =     1125.00 INR

VAT @ 5%                =     56.25 INR

Total                          =     1181.25 INR

Now, the product is lying with him as closing stock when GST comes into effect on 1st July, 2017. Assume that the product falls under 12% GST rate. Since Shiva Enterprises has an invoice for the excise, he will not only get full credit for VAT component, but for the excise component as well. Thus, post GST, when he sells the same product, he will be able to sell at the same cost of 1000 INR.

On the 15th of July 2017, Shiva Enterprises makes a sale to Mahendra Agencies. The invoice will look as follows –

Selling Price         =     1000.00 INR (assuming no profits)

CGST @ 6%         =      60.00 INR

SGST @ 6%         =      60.00 INR

Total                     =      1120.00 INR

Now, let’s see how the GST is set-off against existing tax credits.

Since CGST is set-off against excise credit,

Balance CGST credit = Existing Excise Credit – CGST Liability = 125 INR – 60 INR = 65 INR (which is available for usage in the electronic ledger)

Since SGST is set-off against VAT credit,

Balance SGST credit = Existing VAT Credit – SGST Liability = 56.25 – 60 INR = 3.75 INR (which Shiva Enterprises needs to pay)

Overall, from the perspective of Shiva Enterprises, the net tax credit is still positive. While the CGST and SGST credits are directed to the respective electronic ledgers, the net positive tax credit means that the cash outflow of Shiva Enterprises will not be affected in any way.

This example assumes the rate of VAT as 5%, and the GST rate as 12%. Considering other rates of VAT and GST, the following are the net tax credit values –

Tax RatesVAT @ 5%
GST @ 12%
VAT @ 5%
GST @ 18%
VAT @ 5%
GST @ 28%
VAT @ 14.5%
GST @ 12%
VAT @ 14.5%
GST @ 18%
VAT@ 14.5%
GST @ 28%
Cost1000.001000.001000.001000.001000.001000.00
Excise @ 12.5 %125.00125.00125.00125.00125.00125.00
VAT56.2556.2556.25163.13163.13163.13
CGST60.0090.00140.0060.0090.00140.00
SGST60.0090.00140.0060.0090.00140.00
CGST Bal.65.0035.0015.0065.0035.0015.00
SGST Bal.3.7533.7583.75103.1373.1323.13
Net Tax Credit61.251.25168.13108.138.13

Case 2

VAT Registered Dealer making purchase of excisable goods from a wholesaler, and thus the excise has been passed on as cost, and not as excise charged in invoice
Let us consider a dealer Bhalla Enterprises buying a product from Kapil Wholesalers on 15th of June 2017. The invoice will look as follows –

Cost                    =       1125.00 INR (because the goods have suffered excise, absorbed into cost)

VAT @ 5%        =        56.25 INR

Total                  =        1181.25 INR

Now, the product is lying with him as closing stock when GST comes into effect on 1st July, 2017. Assuming that product falls under the 12% GST rate, since Bhalla Enterprises does not have an invoice for the excise, he will not get 100% credit, but 40% of the CGST paid as credit. In such a circumstance, Bhalla Enterprises needs to work out an optimum price, at which he needs to sell, such that he is able to pass on the right amount of benefit to the buyer, without causing any loss to himself.

Let us assume, that on the 15th of July 2017, Bhalla Enterprises makes a sale to Amar Agencies, at an assumed selling price of 1000 INR. It has to be borne in mind, that these goods have suffered excise worth 125 INR. The invoice will look as follows –

Selling Price                        =     1125.00 INR (assuming no profits)

CGST @ 6%                         =     67.50 INR

SGST @ 6%                         =     67.50 INR

Total                                      =     1260.00 INR

Now, since Bhalla Enterprises does not have an invoice with an excise component, and the rate of GST is 12%, he will be able to claim only 40% of the CGST he is liable to pay, as tax credit.

Hence, CGST credit available = 40% of CGST paid = 40 * 67.50 /100 = 27.00 INR

Now effectively, Bhalla Enterprises had borne the cost of excise worth 125 INR. So equating that with the credit of 27 INR available, we can see that, the effective percentage of credit available in reality, is only = 27 * 100 / 125 = 21.6%. Thus, Bhalla Enterprises, and dealers in this category, will not be getting 40% of the credit, but in essence, much less. Needless to say, they will be in a loss, if they pass on the benefit to the buyers, assuming they have got 40% credit, whereas the actual percentage of credit is lower / different.

This example assumes the rate of VAT as 5%, and the GST rate as 12%, and thus the excise credit available is 40%. Similarly, dealers need to evaluate the scenario for products which were rated at 14.5% VAT and also the scenario for products which may be rated at 18% or higher – which will fetch an excise credit of 60%.

Considering other rates of VAT and GST, the following are the values of the potential benefit, which a dealer in this category can pass on to this customer, without any loss.

Tax RatesVAT @ 5%
GST @ 12%
Excise Credit
@ 40%
VAT @ 5%
GST @ 18%
Excise Credit
@ 60%
VAT @ 5%
GST @ 28%
Excise Credit
@ 60%
VAT @ 14.5%
GST @ 12%
Excise Credit
@ 40%
VAT @ 14.5%
GST @ 18%
Excise Credit
@ 60%
VAT@ 14.5%
GST @ 28%
Excise Credit
@ 60%
Cost1000.001000.001000.001000.001000.001000.00
Excise @ 12.5 %125.00125.00125.00125.00125.00125.00
VAT56.2556.2556.25163.13163.13163.13
Selling Price1125.00
CGST67.50101.25157.5067.50101.25157.50
SGST67.50101.25157.5067.50101.25157.50
CGST Credit

Available / Potential Passable Benefit

27.0060.7594.5027.0060.7594.50
Effective % age CGST Credit Available21.648.675.621.648.675.6

Thus, it has become clear from the above illustration that – for products rated at below 18% GST, the effective credit availability does not even cross 30% – contrary to the stated credit availability of 40%. Only when the products are rated at the highest slab of 28% under GST, is when the percentage of obtainable credit actually cross 60%. But that doesn’t really help as, in both these cases the net tax credit is negative leading to cash outflow for the business. Overall, in all scenarios, such dealers will be in a position of loss.

Conditions

In order to avail the credit of the tax paid, the following are the conditions, which dealers need to keep in mind, while the transition is in progress –

  • A registered dealer, availing this scheme of ITC credit @ 40% on closing stock, has to furnish the details of stock held by him on the appointed date, within ninety days; and also, electronically submit Form GST TRAN 1 duly signed, on the common portal specifying separately, the amount of tax or duty.
  • Additionally, on a monthly basis, the dealer needs to submit statements in Form GST TRAN 2 for six tax periods during which the scheme is in operation – indicating the details of supplies of such goods effected during the tax period.
  • The document for procurement of such goods is available with the registered person.
  • The stock of goods on which the credit is availed, will need to be stored in such a manner, such that it can be easily identified by the registered person.

Solution – Credit Transfer Document

In order to combat all these challenges, the GST law has come up with the concept of “Credit Transfer Document” (CTD). As per this, an excise registered manufacturer may issue a Credit Transfer Document evidencing the payment of excise duty to a registered dealer who is not registered under excise, but is liable to pay CGST under GST regime.

The document may be issued provided –

  • Such goods are valued at INR 25000 and higher, and bears the brand name of the manufacturer or the principal manufacturer, which is identifiable as a distinct number. For e.g. – chassis / engine number of a car.
  • Verifiable records of clearance and duty payment relatable to each piece of such goods is maintained by the manufacturer and are made available for verification on demand by a Central Excise officer.
  • CTD is serially numbered and contains the Central Excise registration number, address of the concerned Central Excise Division, name, address and GSTIN number of the person to whom it is issued, description, classification, invoice number with date of removal, mode of transport and vehicle registration number, rate of duty, quantity, value and duty of excise.
  • The manufacturer is satisfied that the dealer to whom CTD is issued, is in possession of such manufactured goods in the form in which it was cleared by him.
  • CTD is issued within 30 days of the appointed date at which GST comes into force, and copy of the corresponding invoices is enclosed with the CTD.
  • Copies of all invoices relating to buying and selling from manufacturer to the dealer, through intermediate dealers, is maintained by the dealer availing credit using CTDs.
  • CTD is not issued in favour of a dealer to whom invoice was issued for the same goods before the appointed date.
  • The dealer availing credit on the basis of CTD, at the time of making supply of such goods, mentions the corresponding CTD number in the invoice issued by him

Conclusion

All in all, Credit Transfer Document seems to be a ready solution to the problem of credit availability on closing stock, especially for those dealers for whom excise is not part of the invoice. In cases, where such a document may not be obtainable, the following would be the best course of action for a dealer to avoid loss of revenue or a negative impact on cash flow –

  • De-stock all goods which have suffered excise, but for whom excise invoice is not available
  • Ensure that purchases are made only from manufacturers / 1st Stage Dealers / 2nd Stage Dealers
  • Take Excise Registration, which, although a tedious process, that too within the limited time, will bear fruits in terms of 100% excise available as ITC.

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