Transitional Provisions in Certain Cases under GST

Last Update Date : September 19, 2018

The introduction, as well as implementation of GST in our Indian tax structure for goods and services, has become a comprehensive one. In order to amalgamate multiple taxes into one, GST has been implemented by the government. No wonder why businesses are concerned about the transition processes considering its complexity. In any case, a transition to GST is a careful exercise. And to ensure a smooth transition, it is vital to have rules in place to adhere. There are certain provisions applicable to switch from the VAT/service tax/excise regime to the new GST regime.

Take a look at few transitional provisions in certain cases under GST.

Long-term Construction Contracts

The goods/services supplied after the appointed day in pursuance of a works contract entered into before to the appointed day shall be liable to GST. The total value of the contract invoiced after 1st July 2017 shall be subject to tax under GST and value invoiced prior to 1st July 2017 would be subject to tax under existing laws. Here, the tax paid under current tax laws can be claimed as an ITC under GST.

Examples

  1. Mr Shashtri has entered into a contract on 1st June 2017 with Gini Constructions Pvt Ltd. to build a commercial building. In regards to this, materials and services have been supplied by Gini Constructions to Mr Shashtri on 18th June 2017. The payment of this supply was received from Mr Shashtri on 27th June 2017. In this scenario, no GST will be applicable on the materials and services supplied on 18th June 2017 since it was prior to implementation of GST.
  2. Let’s assume that in the given case, materials and services were supplied on 18th July 2017 and the contract entered date is 1st June 2017. In this scenario, GST will be applicable on the supplies made on 18th July 2017 even though contract was signed prior to GST implementation.
  3. In case, the materials and services have been supplied on 22nd June 2017 and invoice was also raised on 22nd June 2017 for the same, but the payment was made on 10th July 2017. In this scenario, GST will not be applicable since according to GST both supply transaction and invoice was done before implementation.

Work Contracts

In work contracts, both supply of goods (cement, bricks, iron, sand, etc.) and services (labourers, supervisors, engineers, masons) are involved. And hence, both VAT and service tax apply to work contracts.

On transition to GST, ITC will be available on pro-rata basis of supply on which either of service tax or VAT has been paid before GST implementation date but the supply is made after the appointed day. To avail the ITC, it is mandatory for the taxpayer to electronically submit a declaration in Form GST TRAN-1.

Example

Gini Constructions and Zebra Ltd entered into a contract on 25th June 2017 to construct a restaurant and invoice was also issued on the same date. The related materials and services were supplied on 7th July 2017.

In this case, GST will not be applied since invoice was issued prior to GST implementation date. Care Constructions has received advance payment from XYZ Ltd. to construct a blast furnace on 27th June for which it issued invoice. It supplied materials and services on 5th July 2017. Will GST apply in this case?

GST will not apply as the supply was made before GST implementation. To avail the ITC, it is mandatory for Gini Constructions to electronically submit the declaration in Form GST TRAN-1 within 90 days from 1st July 2017.

Situation 1 – when contracts are settled on a monthly basis

Example

The annual maintenance contracts are invoiced and settled on a monthly basis on the last day of each month. Accordingly, the invoice raised on 30th June 2017 for the month of June will be settled on 10th July 2017 and invoice raised on 31st July 2017 for the month of July will be settled on 11th August 2017.

In this scenario, the invoice raised for the month of June 2017, the taxes will be discharged under the laws of Service Tax Act since GST was not implemented till then. Similarly, the invoice raised for the month of July 2017 will be taxed under GST regime.

Situation 2 – when contracts are settled on a quarterly basis

Example

The annual maintenance contracts are invoiced and settled on a quarterly basis on the last day of each quarter. 40% of the amounts are settled within a week of invoice date and the balance 60% is settled on the last day of the quarter.
Accordingly, the billed amount of Rs 1,000 raised on 22nd June 2017 for the month of June will be partially settled on 29th June 2017 with Rs 400 and the balance Rs 600 would be settled on 30th September 2017 (end of quarter).

In this scenario, the invoice amount raised in the month of June 2017 of Rs 400, the taxes will be discharged under the laws of Service Tax Act since GST was not implemented till then. Similarly, the invoice of Rs 600 settled on 30th September 2017 (in the quarter of July to September) will be taxed under GST regime.

Job Works and Transition to GST

In case, prior to 1st July 2017, if any raw materials, semi-finished goods or finished goods is sent for further processing to the job worker, there shall be no tax to be paid on the same. However, the following conditions need to be satisfied:

• The details of inputs held-at-stock should be declared on 1st July 2017 by both the Principal and Job Worker on behalf of the sender
• Latest by 31st December 2017,such inputs held-at-stock should be received back by the Principal or the buyer from the Job Worker. Failure to receiving back goods shall result in payment of tax by the Principal under the current laws.

Long-term Contracts and Transition to GST

If the contract is finalised prior to 1st July 2017 but the goods and/or services are provided on or after 1st July 2017, GST would be applicable and payable.

Periodic or Continuous Supplies of Goods and/or Services

In case of continuous supplies of goods and/or services, GST will not be payable on the consideration (either full or partial) received prior to 1st July 2017 even if the supply is made after July 17.

Example

Ms Pooja supplies goods to Ms Aarti on a continuous basis. Goods worth Rs 75,000 were sent on 7th July 2017 of which invoice was prepared on 25th June 2017.

Here, GST will not be applied even if partial or full payment was made. In case, a partial amount was paid on invoice date and remaining amount will be paid after the receipt of goods, then also GST will not be applicable.

However, if the entire payment is made after the receipt of goods i.e. on or after 7th July 2017, GST will be applicable as consideration is received after GST implementation. If the tax has been paid under earlier law, GST will not be applicable

In case, the supply contract is agreed on a piecemeal basis, the pro-rata treatment is applied.

  • Value of goods and/or services received in respect of goods and/services received before 1st July 2017 – amount subject to tax under the existing (current) tax laws
  • Value of goods and/or services received in respect of goods and/services received after 1st July 2017 – amount subject to tax under GST laws

Goods or Capital Goods lying with Agents and VAT paid on it

VAT paid on goods or capital goods belonging to the principal are lying with agents on the appointed day, they should be allowed as credit. Here, the agent is considered eligible to take ITC paid on such goods. The following conditions need to be met to take credit of input tax:

  • Invoices for such goods or capital goods should not be more than 12 months old.
  • The principal must declare the details of goods lying with agents on or before 30th June 2017 in the form GST TRAN-1. The form needs to be submitted within 60 days of the appointed day.
  • The agent is registered under GST.
  • The principal has either reversed or not availed of ITC regarding such goods.

Service Tax Credit Distribution by ISD

ITC available to ISD (Input Service Distributor) as on 1st July 2017 can be distributed as CGST and IGST to the recipient in the same state and the different state respectively. If goods and/or services were delivered prior to 1st July 2017 but invoice was received by the buyer on or after 1st July 2017, input credit to be carried forward CGST (in the same state) or IGST (in different state).

Example

Seasons Ltd has it’s Head office for four branches: P, Q, R and S. The head office has received services worth Rs 1,50,000 on 23rd June 2017 for which invoice was received on 6th July 2017.

Here, Seasons Ltd. can distribute Rs 1,50,000 as credit under GST. It will not be treated as carried forward credit.

How can H&R Block help you?

After the implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.

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