The date of implementation of Goods & Services Tax (GST) is now certain and from 1st April, 2017, India will enter the new indirect tax regime bringing great deal of uniformity and robustness which will impact every business and industry. This leaves the industry with just a few months to prepare for the transition. Every transaction and every document need to be analysed from tax point of view to appreciate the impact of the new tax system and transitional strategies are required to be put in place. Does the Model Law enable businesses to plan effectively? This article tries to find an answer to this question.
The Model Law on GST contains transition provisions under Sections 143 to 162E of Model GST law. The aforesaid provisions, once enacted in the final legislation, will play a vital role for transiting from the existing excise/VAT/service tax regime to the GST regime. The above provisions cover various situations so as to allow carry forward of Cenvat credit and VAT credit available under the existing laws to GST regime and set off of such taxes paid under the earlier laws in GST law. These provisions also provide mechanism to deal with situations relating to refund claims, litigation and recovery of tax dues pending under the earlier laws.
It may be pertinent to note that these provisions cover various business scenarios that any business is likely to face during the transition period. However, there are few scenarios that have not been covered under the transition provisions and hence may need immediate attention to make such transition hassle-free for the businesses. These are being discussed in the paragraphs below.
Carry forward of eligible credit
Transition provisions allow an existing taxpayer to take credit of such amount which represents Cenvat credit / input tax credit carried forward in the returns furnished by them under the earlier law. Resultantly, a taxpayer migrating to GST regime will not able to take the credit of taxes paid by him on goods and/or services received by it under the earlier laws for which they were not allowed to take the credit under the said earlier law and hence not included in the returns filed under the earlier laws. Likewise a trader will not be able to take the credit of duties paid under the Central laws when he steps into GST regime and a service provider will not be able to take the credit of taxes paid under the State laws from 1st April, 2017 when GST will be in place.
Tax paid before but supplies received later
In cases where amount including duties/taxes have been paid to the provider of inputs or input services under the earlier laws but the supplies are to be received on or after the appointed day, the receiver of such inputs or input services will not be able to take the credit of taxes paid under the earlier regime. The transition provisions do not provide for taking credit of taxes paid on such inputs and input services received under GST regime for which taxes have been paid under earlier laws. These observations are made based on Model Law on GST and businesses need to check if the actual law i.e. CGST Act, IGST Act and SGST Act also contain similar provisions and then prepare themselves accordingly.
Credit taken earlier but GST-exempted
The transition provisions allow a manufacturer engaged in manufacturing exempted goods or a service provider engaged in providing exempted services under the earlier laws to take credit of eligible duties/taxes on inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock on the appointed day if he is liable to pay tax under GST. However the Model Law provisions is silent or not clear as to whether assessees engaged in manufacturing dutiable goods or providers of services engaged in providing taxable services under earlier regime but opting for exemption under the GST regime are required to pay any amount in respect of Cenvat credit taken by them under the earlier laws in respect of inputs lying in stock or contained in semi-finished goods or finished goods lying in stock as on appointed day.
Credit not distributed before appointed day
Transition provisions allow an Input Service Distributor to distribute under GST regime, the input tax credit in respect of services received prior to the appointed day (under the GST regime). However there is no clarity on the issue as to whether ISDs will be allowed to carry forward credit which remains undistributed before appointed day or such credit would lapse. The actual legislation may or may not cover such issues but the industry should put in place appropriate compliance mechanism to address them.
Supplies made before but invoices raised under GST regime
In cases where the contracts are entered before the appointed day and in respect of such contracts, goods have been cleared or services have been provided before the appointed day but the invoices for such supplies have been raised on or after the appointed day, taxes would have been paid under the earlier laws because of point of taxation arising under the earlier laws. In such a situation, since the invoices will be raised under GST regime there would be dual tax incidence on the taxpayer. The Model Law is silent on this aspect and no mechanism has been contemplated under the transition provisions for adjusting the taxes paid on such supplies under the earlier laws. The draft law provisions do not allow a taxpayer to take credit in respect of inputs and input services that have been received in the earlier law but for which the invoices are received under GST regime.
No provision is provided for first stage dealers, second stage dealers and registered importer to carry forward the Cenvat credit on goods lying in stock before the appointed day. There are several other grey areas where the actual law may throw light or may provide scope for disputes in the GST regime. As the law is in the making, one hopes that such issues are addressed in the transition provisions to ensure that the benefits available under the existing laws are effectively available to the taxpayers in the GST regime.
[The author is a Joint Partner, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]