GST – Planning for migration of eligible duties suffered on closing stock held prior to date of GST rollout

Published on: Jun 2017
GST – Planning for migration of eligible duties suffered on closing stock held prior to date of GST rollout
(by CA. Jatin Sanghvi, June 3, 2017)
As a part of GST transition planning, it is of vital importance for every Company to examine the profile of its stock-in-hand well in advance of GST rollout so that it can plan well to identify and quantify the credits on closing stock which can be migrated to GST.
A physical verification of stock should be planned on the last day prior to GST rollout to identify such stock and trace the purchase invoices under which such stocks were bought to do a build up of the credit of eligible duties that can be migrated.
In this article, the author examines different situations where credit of eligible duties on closing stock can be migrated to GST:
  1. Holding stock on which duty is paid and VAT ITC / CENVAT Credit availed in existing regime.  One need not identify these stocks since ITC availed would already be reflected in the Excise / VAT return of that month and one can migrate the closing balance of ITC / Credits as per last period returns filed in existing regime to GST, subject to compliance with certain conditions like filing of return for last 6 months etc.
  2. Do we hold stock on which eligible duties have been suffered and for which we could not avail credit since we were not registered under such Act? For example a trader having purchased goods from manufacturer suffered Excise duty and VAT on the purchases but would have availed ITC of VAT alone and could not avail CENVAT Credit of Excise Duty paid since the trader is not registered (and not required to as well) under Central Excise.  Under GST Transitional Provisions, one can avail credit of such stocks provided the trader is in possession of documents evidencing payment of duty on such stocks.
  3. Do we hold stock of goods which are used for manufacture of exempted goods / providing exempt services as per present laws but in GST our output could become taxable?  The Excise law provides for duty exemption on manufacture of certain products.  Similarly Mega Exemption Notification under present law prescribes situation where output services are exempt.  If our output is presently exempt but is taxable in GST, then we can take credit of the input in stock which will be used for manufacturing taxable outputs / providing taxable services in GST.
  4. Assume a situation where a person is providing works contract services at present. The existing service tax law gives him an option to pay output tax on his services at either full value or claim abatement.  The advantage to claim abatement is that burden of cost of output services to his customers reduces.  However, as a condition to claim abatement, he has to forego the CENVAT credit on his inputs used for rendering the Works Contract services.  Under GST, till now, there are no proposals to allow abatement under GST.  If so then the Works Contract services on which hitherto abatement was permissible would not have to suffer full output tax in GST.  In this scenario, GST Law deems it fair to allow the service provider to migrate CENVAT Credit on inputs purchased and held in stocks on last day before GST rollout.
  5. The concept of person as First Stage Dealer, Second Stage Dealer and Registered Importer evolved under current Excise regime to allow traders to pass on benefit of certain duties (Excise / CVD / SAD etc) to manufacturers under an invoice, since they themselves can’t utilise such duties.  Under GST, these categories of person would lose their identity and be able to pass on the credit by levy of output GST, just like any other supplier.  Hence, it becomes vital for these categories of persons are to take credit of eligible duties on closing stock.
  6. Stock held by Warehouse / Depot: Excise Duty is levied on removal of goods from factory, say to depot.  These depots, which are not registered under Central Excise, can migrate the Excise Duty suffered at time of removal of stocks from factory, to GST.

The above article is just a summary for obtaining preliminary understanding of the concept and one needs to refer to Chapter 20 of the CGST / SGST Act and Rules regarding Transitional Provision to know more about the finer details like conditions, extent and limits, procedures for migration of eligible duties to GST.