GST Transition: How to Migrate Existing Input Tax Credits?

Ashish M. Shaji

06 Apr, 2021

There is a lot of anticipation surrounding the much-awaited Goods and Services Tax or popularly referred to as the GST. Experts have different opinions regarding the impact of the GST on SMEs (that is Small and Medium Sized Businesses). On one hand, large business enterprises have already started gearing up for GST transition, the SMEs are still grappling with a lot of doubt and confusion. Businesses need to make suitable changes as per the current system, making themselves compliant with GST. Small and medium businesses do not have the necessary clarity about how to prepare for a smooth and effortless transition to GST.

The Institute of Chartered Accountants of India recently organized a forum where the concern of SMEs regarding preparation for the impending transition was raised. There were doubts relating to the transfer of input credits from one Service Tax or VAT to Goods and Service Tax. Let us discuss how small and medium-sized businesses can prepare themselves for smooth GST transition from the current tax structure.

Input Tax Credit

As per the GST Law, credits of taxes being paid can be carried forward by a taxable person in return. The transfer of last credit sets needs to be done as per the Online GST Registration. To this, the trader needs to furnish a proof of the last return that was filed under the old taxation scheme. It is important to include input taxes that are paid and this way, the credit of the same can be claimed under the latest regime.

GST was rolled out on July 1st, 2017. The taxpayers must take all of the stock with them into account on or before 30th June 2017 and during filing the returns, the input credit needs to be claimed for the period that is going to end on 30th June 2017. The taxpayer needs to make sure that all the services and goods are eligible under GST Law for such a credit.

Input Credit on Capital Goods

Under GST Transition the new tax regime is also going to allow input credit on capital goods that have been brought under the earlier tax regime. The transition provisions are clearly specified as per model GST Law^[1] and approve this provision clearly.

Credit of Additional Customs Duty or Excise Duty

GST is a much-awaited piece of legislation and credit of additional customs duty, or excise duty is one of the major transitional provisions under the GST. As per the current tax situation, the credit of additional customs duty or excise duty was not allowed to the trader against excise. In the new regime, things will be different. As per the latest tax regime, goods supply will come under the purview of GST, but a credit of additional custom or excise duty would not be allowed. As a result, GST would be levied on already taxed goods as per the current tax regime without any availability of credit. This may result in a price distortion.

The immediate result of this situation may be traders and dealers returning stocks to the manufacturers before the selected date. Subsequent to this date, a new purchase may be made. This situation may also lead to chaos and panic among manufacturers that may affect their returns and profits.

GST Composition Scheme

As per the GST Composition Scheme, it is imperative for the taxpayers to keep themselves updated and informed about the implications of migrating from the existing tax regime to the new tax regime.

This migration from the old to the new system is going to have a huge impact on the turnover limit as per GST, which is moved to Rs. 1.5 Crore as against Rs. 10 Lakh, the extant limit. Thus, a fair assumption can be made that a majority of taxpayers will be moving from regular tax payment to tax payment under the composition scheme.

Conversely, it is also possible that at the time of GST transition the dealers falling under the composition scheme may revert to being the regular taxpayers. This is a possibility in a situation when the goods in which they have been dealing are not a part of the exemption list as per the new tax regime.

Conclusion

Provisions have been made for smooth transition of Input Tax Credit under VAT, Excise Duty, or Service Tax to GST. Do you wish to register for GST? Or are you looking for a GST Registration advisory? Would you like to know about the GST laws? Please feel free to contact Enterslice, India’s leading online legal and tax advisory firm.

Read our article:What is Composition Scheme Under GST Law