Old credits _Carry forward to GST Regime

Old credit lying in books of accounts/ returns – Carry forward to GST Regime 

As we are moving towards GST, it is important to understand the transitional provisions to better tune businesses towards smooth conversion into the new tax regime.

One of the important aspect of transition is the flow of accumulated credits from old/ current law to new GST regime.

In this article we have tried to analysis the case of high volume of accumulated credits lying in books/ returns which needs to be carried forward in the GST regime.

Many organizations, currently are facing a situation where they have accumulated credits lying in their books for various reasons like rate of tax on output is lower than inputs, credits have accumulated in the past and the organization does not have any business activity currently going on to set them off, etc.  In most of these cases, the credit has been availed/ taken and the output by way of goods manufactured/ sold or services provided have been effected and indirect taxes due on the same have been paid.  The credit available in the books is after all the utilization/ apportionment towards duty/ tax liabilities.

The moot question in all these cases is whether these credits would be allowed to be carried forward in GST regime and if the answer is positive, than what precautions need to be taken.

Before we move on to search for possible answers to the above, let us first look at Section 167 of the Revised Model GST Law (MGL).

(CGST Law)

A registered taxable person, other than a person opting to pay tax under section 9, shall be entitled to take, in his electronic credit ledger, the amount of cenvat credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished, by him under the earlier law in such manner as may be prescribed:  PROVIDED that the registered taxable person shall not be allowed to take credit unless the said amount is admissible as input tax credit under this Act.

(SGST Law) A registered taxable person, other than a person opting to pay tax under section 9, shall be entitled to take, in his electronic credit ledger, credit of the amount of Value Added Tax [and Entry Tax] carried forward in the a return relating to the period ending with the day immediately preceding the appointed day, furnished, by him under the earlier law, not later than ninety days after the said day, in such manner as may be prescribed:  PROVIDED that the registered taxable person shall not be allowed to take credit unless the said amount is admissible as input tax credit under this Act:

From the reading of the above section it emerges that to carry forward credit following conditions need to be fulfilled:

    1. Credit can be availed by a Registered Taxable Person (RTP) (other than RTP paying tax under Section 9 ie Composition Scheme)
    2. Credit must be captured in the last return filed under the earlier law as carried forward amount
    3. Credit will be available only in cases where last return is filed in manner prescribed (CGST) and within 90 days from GST effective date (SGST)
    4. Credit will be allowed to be carried forward only if the same is admissible as input tax credit under the GST Law

Now that we can be mindful of complying with condition 1 to 3, it is important to understand credits which are admissible under MGL.

The MGL has not defined expressly under any section “Admissible credits”.  Hence the meaning of this phrase should drawn based on the reading of credit provisions ie Section 16 to Section 22.

These sections provide for various conditions, restrictions for availing credit of tax paid on goods and services used or intended to be used for furtherance of business.

However, these sections are not defining any express principles stating that credit will be allowed only on following items or likewise.  Rather these sections are giving negative list of goods/ services credit of which would not be eligible or restricted.  Hence, in effect all credits are admissible unless expressly disallowed/ restricted.

Further, it is also important to analyze whether the time limit to avail credit would be applicable to these cases.  Section 16(4) provides for the time limit to avail credit as below:

A taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

From reading of the above provision, it emerges that once GST is effective, all admissible credits have to be availed within the above prescribed time lines.  In other words, the above section does not determine whether the credit is eligible/ admissible or disallowed/ restricted.  It only provides the time frame for availment of credit.

Given the above, once a credit under the earlier law is admissible, irrespective of the period to which it relates/ dates back; it should be allowed to be carried forward.

Here, it is important that the person availing past credits has invoice/ debit note or other documentation to justify its claim of credit under the new law.  At this point in time, it would be important to take stock of all such credits lying in books/ returns and start collating requisite documentation to substantiate these claims under forthcoming GST regime.

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2 Comments on "Old credits _Carry forward to GST Regime"

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Vadhyar
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There is a comment that credits lying before 1st july 2017 cannot be carried over . Is it true? If such is the case which gst chapter mentions about the same?

Vadhyar
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There is a comment that credits lying before 1st july 2016 cannot be carried over . Is it true? If such is the case which gst chapter mentions about the same?

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