On the date of transitioning to GST, broadly there will be business that fall under any of the following categories:
- Businesses not liable to be registered under the current law, but are liable for registration under GST
- Business which are engaged in the manufacture or sale of exempted goods or services
- First stage dealer or a second stage dealer or a registered importer
1. Businesses not liable to be registered under the current law, but are liable for registration under GST
As per the Central Excise Act and Rules, a manufacturing unit is required to register if its aggregate clearance value crosses Rs 1.5 crores, and needs to discharge the duty. Similarly, under VAT, you are liable for registration if your turnover during the financial year crosses the threshold limit. The threshold limit differs from state to state.
Today, you may not be liable for registration as your threshold limit does not exceed the prescribed limit. However, you become liable to register under GST, if your threshold limit exceeds Rs 10 lakhs for Special Category States (Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand) and Rs 20 Lakhs for the rest of India.
2. Business which are engaged in the manufacture or sale of exempted goods or services
You may be currently engaged in the manufacture, sale of exempted goods or provision of exempted service, but on transition to GST, these are taxable.
3. First stage dealer or a second stage dealer or a registered importer
As a dealer, you are liable for registration under Central Excise if you trade in excisable goods. Today, the excise duty you pay will not be available as credit, as a first stage or second stage dealer adds the excise duty paid to the price of the product. If it is sold to a manufacturer, the excise duty passed on, will be claimed as CENVAT credit by the buying manufacturer.
Similarly, you need to register under Central Excise as an importer if you are importing the goods, and discharge the applicable import duty.
Under above mentioned scenario, the common question every business will have is “Can I avail Input Tax credit on the stock held on the last day prior to GST implementation”?
Yes, you will be allowed avail the Input Tax credit (CENVAT, input VAT, entry tax and Service Tax) held in the closing stock of inputs (raw- materials), semi- finished goods, and finished goods. However, there are conditions that you need to meet to be eligible to avail Input Tax credit held in your closing stock.
Eligibility conditions to avail Input Tax credit held in your closing stock
You can avail Input Tax credit held in your closing stock if,
- The closing stock is held either in the form of raw materials, semi-finished goods, or finished goods, and must be used or intended to be used for taxable supplies.
- The benefit of such credit is passed on, by way of reduced prices, to the recipient. In current tax regime, duty/tax is added as product cost since the Input Tax Credit is not allowed. On transition to GST, ITC will be allowed, and this should naturally result in the reduction of base cost, and subsequently reduced final price to customers
- You are eligible for input tax credit under GST. In GST, you are eligible for Input Tax credit if you are a regular tax payer only. A taxable person opting for composition levy under GST is not allowed to claim Input Tax credit.
- You have invoices or any other prescribed duty/tax-paying documents in respect of the closing stock of inputs (including semi-finished goods and finished goods).
- The date of invoices or any other prescribed duty / tax-paying documents is within 12 months from the date of transitioning to GST.
- The supplier of services is not eligible for any abatement under the act.
Let us understand this with an example.
Ravindra Automobiles is a registered excise dealer in cars and car spare parts. On 1st March, 2017, Ravindra Automobiles purchased spare parts, and the details of transaction are given below:
|Date||Stock Item||Qty||Rate / qty||Total Value||Vat @ 14.5%||Excise Duty 12.5%|
|01-03-2017||Spares||50 Nos||1500 / Nos||75,000||10,875||9,375|
As on 31st March, 2017, the closing stock of spares held by Ravindra Automobiles is 30 Nos.
- As per the current tax structure, Ravindra Automobiles can avail the Input VAT of Rs 10,875 as credit, and can set this amount against the output VAT. However, excise duty is not allowed as Input Tax credit. Therefore, it is added to the product cost. Now, on transitioning to GST, Ravindra Automobiles is allowed to avail the Input Tax credit of excise duty on the closing stock held by them.
Let us consider the above example and calculate the excise duty on closing stock, which can be availed as Input Tax credit.
|Closing Stock as on 31-3-2017||30 Nos|
|Duty Per Unit ( Total Excise Duty 9,375 / Quantity 50 Nos )||187.5 / Unit|
|Balance Duty on closing Stock (Duty per unit 187.5 * Closing Stock 30 Nos )||5,625|
Now, Ravindra Automobiles knows that they can avail the excise duty of Rs 5,625 on the closing stock held, but are they eligible to avail it?
To be eligible, Ravindra Automobiles has to meet the following conditions:
- The closing stock held must be used or intended to be used for taxable supplies.
Yes, the closing stock of 30 nos will be used for taxable supplies.
- The benefit of such credit must be passed on, by way of reduced prices, to the recipient.
Since Input Tax credit is available, Ravindra Automobiles will no longer add this to the product cost. As a result the base cost will reduce, and subsequently result in reduction of price.
- They are eligible for Input Tax credit under GST.
- They should have invoices or any other prescribed duty/tax-paying documents in respect of closing stock of inputs (including semi-finished goods and finished goods).
Ravindra Automobiles has the Rule 11 invoice issued by their supplier (Manufacturer) in respect the closing stock of 30 nos.
- The date of invoices or any other prescribed duty/tax-paying documents must be within 12 months from the date of transitioning to GST.
The closing stock of 30 nos held is against the purchase dated 1-3-2017, which is within 12 months, assuming GST will be implemented on 1-4-2017
Ravindra Automobiles meets all the above conditions and is eligible to avail the excise duty of Rs 5,625 as CGST Input Tax credit.