ITC on Stock Transition Provision under GST

Last Update Date : April 29, 2019
Estimated Read Time: 4 min

itc on stock transition

Post the roll-out of GST in July 2017, the existing businesses which were registered in the previous tax regime had concerns about the old tax benefits and Input credits which were accumulated in the past. Thus, moving such credits into GST regime becomes of utmost importance.

These taxes are paid while purchasing inputs, raw materials, semi-finished goods, finished goods.

What is ITC on Stock Transition Provision?

Input tax credit of stock and input with regards to semi-finished goods and finished goods, of eligible duties and taxes, will be available to eligible taxpayers under GST only if the following conditions are fulfilled:

  1. The persons who are registered as first stage dealer or second stage dealer or registered importer
  2. Persons who are dealing with exempted goods or services
  3. A registered person who is not liable to get themselves registered under the earlier law
  4. One who is providing works contract service or avails the benefit of exemption listed in notification number 26/2012 ST dated 20/6/2012
  5. Depot of Manufacturer

First Stage Dealer or Second Stage Dealer or Registered Importer

Under the law of Central Excise, first stage dealer means a person who purchases goods directly from the manufacturer as per the provisions of excise. Second stage dealer means one who purchases from first stage dealer.

Every first stage dealer or second stage dealer should get themselves registered as a dealer and are not eligible to take credit of excise duty paid. The excise duty involved is allowed as a credit to the registered manufacturer of dutiable goods. Thus, such dealers only pass on or transfer the credit and not utilise it.

On the same terms, an importer of goods is required to be registered so that he can pay off the import duties.

Not liable to get Registered under Current Law

Under the Excise Law, every manufacturer does not have to get himself registered or discharge the liability to pay the taxes under the Act if his aggregate turnover does not exceed Rs 1.5 crores. In case the turnover exceeds the limit specified in a financial year which is different in different states, a person is required to be registered under the VAT Act.

As per GST Law, a taxpayer is liable to register in case aggregate turnover in one financial year exceeds Rs 20 lakhs (Rs 10 lakhs in case of the Special Category States). Hence, here persons who were not required to be registered under the previous tax laws but have to get themselves register under GST Act, will have to discharge the duties and taxes under GST on transition.

Providing Works Contract Service or Other Services

If a person was engaged in providing exempted services or was dealing with goods on which tax was not levied, and was thus not liable to pay duties earlier. Such person will be liable to discharge the same on transition if the goods are not covered under exempted goods in GST Act.

Conditions to Claim ITC

  • The inputs must be used for making taxable supplies only.
  • Under the previous tax regime, input tax credit was not allowed which led to increased prices of goods or services. Whereas under GST, the credit of such input taxes or duties is allowed which will lead to reduced prices of such goods or services. This benefit of ITC must be passed to the buyer or recipients of such goods or service.
  • A taxable person must possess invoice or other documents evidencing payment of duty and taxes under current law.
  • The date of invoice and/ or other documents issued must be within 12 months to claim a credit of tax paid under pre-GST regime from the date of transition to GST.
  • ITC will be allowed subject to certain limitations as may be prescribed by the law in the case where the registered taxable person does not possess invoice or other documents evidencing payment of duty under the current law.

How to Claim ITC on Old Stock? Which Form to Choose?

Any business, irrespective of being registered or not before GST and having a closing stock, will be entitled.

For a smooth transition of the business and carry forward of the ITC, 2 transition forms, i.e. TRAN 1 and TRAN 2 have been released by CBEC.

TRAN 1 form is filed by the registered person under GST who may or may not be registered under the old regime (VAT Act, Service Tax, Central Excise). The composite dealer registered under GST is not liable to file TRAN 1.

TRAN 2 form is filed by the registered person under GST but unregistered under the old regime. A dealer or trader who does not have documents evidencing payment of taxes can also file TRAN 2.

A service provider registered under Service Tax or a manufacturer registered under Excise cannot file TRAN 2.

Points to Remember for Transition to GST

  • For each GSTIN a separate Transition form must be filed.
  • Any credit that has to be carried forward from the old regime to the new one, must have to be an eligible credit under GST as well.
  • When you have filed past six months returns under the old regime, then the accumulated credits of the old regime are eligible to be taken to GST and thus availed. So, you must file old returns of VAT/ Excise/ Service Tax properly.
  • Central taxes and duties such as Central Excise Duty, additional Customs Duty and Service tax will be carried forward as CGST.
  • Any state taxes such as VAT, Purchase tax, Entry tax will be carried forward as SGST.

These are the transitional provisions about the stock credit. As we are aware that TRAN 1 due date has already lapsed, but Filing of TRAN 2 has been extended from 31st March to 30th of June. If you face any problem, feel free to reach us at earlyGST by H&R Block and we will solve all your queries as well as file your taxes for you.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.