INTRODUCTION

The introduction of GST was not just a tax reform. It was more of an amazing economic reform that brought about the concept of One Nation One Tax. GST as an ecosystem enabled India Inc., to take business decisions without really having to look for tax impacts as One Nation One Tax enabled companies to run their business in any State or Union Territory where the impact of Indirect tax was the same. It also ushered in the concept of “Ease of doing business” in India from an Indirect tax perspective.

The plethora of Union and State levies were subsumed into One GST (of course there is a breakup of IGST or CGST Plus SGST). The introduction of GST as an ecosystem meant the levy of the legacy laws were scrapped overnight at the ticking of the clock on the midnight of 31.06.2017. This automatically necessitated the issue of making available some of the credits that were piled up as regards both the Union levies as well as the various State Levies.

The GST sets out transitional provisions to deal with the change from erstwhile taxes such as Service Tax, Excise, VAT etc. to GST. The transitional provisions essentially covered how the credit, procedures, and litigation under erstwhile tax laws should be dealt with when moving to GST Era. This Note focuses on the transitional provisions of Credit under erstwhile taxes into GST Law as set out in the law and what has come of it after 5 Years of GST, especially in light of the recent Judgment of Hon’ble Supreme Court and Circular issued pursuant to it allowing for reopening of portal for filing/revision of TRAN Forms.

TRANSITIONAL PROVISIONS

The GST ecosystem provided for transition provisions under the GST Act to enable a registered person take the credit of taxes and duties paid under the legacy laws be it the Union levies or the State Levies such the Central Excise Duties (Cenvat Credit), the Service tax paid (Cenvat Credit), the ITC of Value Added Tax to name a few and to subsume them as a GST credit with certain amount of Caveats as set out in the GST Ecosystem.

 As GST sought to consolidate multiple taxes namely into one, it is very essential to have transitional provisions to ensure that the transition to the GST regime ought to be very smooth and hassle-free and no ITC (Input Tax Credit)/benefits earned in the erstwhile laws were lost. Accordingly, as per the Central Goods and Services Tax Act, 2017, Section 140 set out the Transitional arrangements for input tax credit. Section 141 set out the Transitional provisions relating to job work and Section 142 set out Miscellaneous transitional provisions. Rule 117 to 121 of the CGST Rules, 2017 also pertain to the transitional provisions.

The transition provisions can be categorized under the heads:

• Relating to Input Tax Credit.
• Continuance of existing procedures such as job work for a reasonable period without any adverse consequence under GST law.
• All claims (pending as well as future) pertaining to existing laws filed before on or after the appointed day.

Eligible and restricted Credit:

1. Transitional arrangements for Input Tax Credit (ITC)

ITC of various taxes under the existing laws (CENVAT credit, VAT etc.) would be carried forward as under:

• Closing balance of the credit in the last returns:

The closing balance of the CENVAT credit /VAT in the last returns filed under the existing law can be taken as credit in electronic credit ledger. Such credit would be available only when returns for the previous last six months have been filed under the existing law.

• Un-availed credit on capital goods:

The balance instalment of un-availed credit on capital goods credit can also be taken.

• Credit on duty paid stock:

A registered taxable person, other than the manufacturer or service provider, may have duty paid goods in his stock on the appointed day. GST would be payable on all supplies of goods or services made after the appointed day. It is not the intention of the Government to collect tax twice on the same goods. Hence, in such cases, it has been provided that the credit of the duty/ tax paid earlier would be admissible as credit.

• Credit on duty paid stock when Registered Person does not possess the document evidencing payment of excise duty/VAT:

For traders who do not have excise or VAT invoice, there is a scheme to allow credit to them on the duty paid stock.

• Credit relating to exempted goods under the existing law which are now taxable:

Input Tax Credit of CENVAT in respect of input, semi-finished and finished goods in stock attributable to exempted goods or services which are now taxable can also be taken.

• Input/input services in transit

There might be a scenario where input or input services are received on or after the appointed day but the duty or tax on the same was paid by the supplier under the existing law. Registered person (RP) may take credit of eligible duties and taxes, provided the invoice has been recorded in the books within 30 days from the appointed day. A statement of such invoices has to be furnished. ISD can also distribute such credit.

• Tax paid under the existing law under composition scheme

Those taxpayers who paid tax at fixed rate or fixed amount in lieu of the tax payable under the existing law but are working under normal scheme under GST can claim credit on their input stock, semi-finished and finished stock on the appointed date, subject to certain conditions.

• ITC in case of Centralized Registration under service tax

Such Registered Person can take credit of the amount of CENVAT carry forwarded in return furnished under the existing law, if the original/revised return under the existing law has been filed within three months. Such credit may be transferred to any of the Registered Persons having the same PAN for which the centralized registration was obtained.

• Reclaim the reversed Input Service credit

CENVAT credit reversed on account of non-payment of consideration within three months can be reclaimed if payment is made to the supplier of service within 3 months from 1st July 2017.

• Where any goods or capital goods belonging to the principal are lying at the premises of the agent on the appointed day

This provision is specific to SGST law. In such cases, agent shall be entitled to take credit, subject to certain conditions.

2. Transition provisions relating to job work, goods returned/sent on approval etc.

• Job work

Inputs, semi-finished goods or finished goods were sent to the job worker or any other premises without payment of duty/VAT under the existing law. No GST is payable by the job worker when such goods are returned by him within six months after the appointed day.

If not returned within the prescribed period, then ITC shall be liable to be recovered from the principal as per second provision to section 141(1) of the Act. In addition, the job worker will have to pay the GST on such supplies.

In case of semi-finished goods, the manufacturer may transfer the goods to premises of a Registered Person without payment of tax within the prescribed period.

In case of finished goods, the manufacturer may transfer the goods on payment of tax or clear for export within the prescribed period.

• Goods removed before 6 months of the appointed day i.e., 1^st July 2017 but returned within 6 months from 1^st July 2017:

If such goods are returned by an unregistered person, then refund of the duty/VAT paid under the existing law can be claimed.

If returned by a Registered Person, then the return of goods shall be treated as supply of goods (ITC can be claimed).

• Goods sent on approval basis before 6 months of the appointed day i.e., 1st July 2017 but returned within 6 months from 1st July 2017:

No tax is payable by the person returning the goods. If returned after that, tax is payable if the supply is taxable under GST (by the recipient).

If not returned, tax is payable by the person who sent the goods on approval basis.

3. Proceedings under the existing laws

GST law became operational w.e.f. 1st July 2017 and the then existing laws were repealed. Elaborate provisions have been made to save the pending as well future claims relating to existing law made before, on or after the appointed day i.e., 1st July 2017. Such proceedings may pertain to refund claims of CENVAT credit/VAT or export related rebate or service tax, such proceedings may either result in recovery of tax or refund.

All such cases would be disposed of under the existing law. If any claim for refund of CENVAT credit is fully or partially rejected, the amount so rejected shall lapse. Refund of CENVAT credit shall be paid in cash. There will be no refund of CENVAT if already carry forwarded. If any amount becomes recoverable, the same shall be recovered as arrear of tax under GST Act.

Restrictions:

The said transitional provisions were applicable a person was entitled to take the ITC of the credit of the legacy laws provided that the registered person shall not be allowed to take credit in the following circumstances, namely: —

• where the said amount of credit is not admissible as input tax credit under this Act; or
• where he has not furnished all the returns required under the existing law for the period of 6 months immediately preceding the appointed date; or
• where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.

Transferring closing balance credit of cess to GST

Earlier, as per section 140(1), the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished under existing laws was allowed to be transitioned into CGST. As provided in the Explanation in section 142, CENVAT Credit shall have the meaning assigned in the Central Excise Act, 1994 (1 of 1944) or the rules made thereunder. CENVAT Credit as defined in CENVAT Credit Rules, 2004 includes Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess.

Later vide s.28 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018) – Brought into force w.e.f. 01st February, 2019, the words ‘of eligible duties’ was inserted after ‘CENVAT credit’ into the section 140(1) w.e.f. 01^st July 2017 (retrospective), thereby restricting the credit that can be transitioned into GST regime from ‘CENVAT Credit’ to ‘CENVAT Credit of eligible duties’

The list of duties set out in Explanation to section 140 as ‘eligible duties’ does not include cesses such as education cess, secondary higher education cess, Krishi Kalyan cess that were allowed to be taken as CENVAT Credit under erstwhile taxes. Therefore, these cesses are not allowed to be transitioned as credit under GST.

Swatch Bharat Cess (SBC) is also not be eligible to be carry forwarded to GST regime.

In the case of Assistant commissioner of CGST and Central excise Vs. M/s Sutherland global services before the Hon’ble Madras High Court, the Hon’ble Court was of the opinion that Credit of Cess is not allowed to be carried forward under GST.

Thus, to conclude credits of cesses such as Education Cess, Secondary and Higher Education Cess, Swatch Bharat Cess and Krishi Kalyan Cess are not eligible for TRAN-1.

It is pertinent to note that Companies do not choose to transition the credit of Cess when the Portal reopens for availment of transition of the credit.

Extension of timelines:

The due date for filing TRAN-1 was extended multiple times. Vide CBEC Order no. 9/2017 dt. 15.11.2017 it was finally extended to 27^th December 2017.

The revision of TRAN-1 is allowed as per rule 120A. Vide Order No. 10/2017-GST F. No. 349/58/2017-GST Dated 15th November, 2017 the period for submitting the declaration in FORM GST TRAN-1 was extended till 27th December, 2017.

Further, the rule 117 was amended to allow the Commissioner, on the recommendations of the Council, extend the date for submitting the declaration electronically in FORM GST TRAN-1 by period not beyond 31st March, 2020, in respect of registered persons who could not submit the said declaration by the due date on account of technical difficulties on the common portal and in respect of whom the Council has made a recommendation for such extension. Vide Order No. 01/2020-GST F. No. CBEC-20/06/17/2018-GST (Pt. I) Dated 7th February, 2020, the Commissioner extended the period for submitting the declaration in FORM GST TRAN-1 till 31st March, 2020 to such cases.

VARIOUS ISSUES IN AVAILING THE LEGACY LAWS CREDIT AS A GST CREDIT AND THE RESULTANT SLEW OF CASES BEFORE VARIOUS FORA

While the TRAN-1 enabled India Inc and rightfully so to take the credit of the legacy laws onto and into the GST ecosystem, the same came with quite a bit of extenuating issues pertaining to system glitches, technical errors, inability to readjust the credit once the one time revision was done, inability to take the credit that got accumulated beyond the implementation date, inability of smaller player to understand how the system worked and so on. This led to various cases being filed as writ before the High Courts and the cases finally reached the hallowed halls of the Hon’ble Supreme Court as well.

JUDICIAL PRONOUNCEMENTS MADE BY HIGH COURTS.

In order to keep the note, brief we are setting out only the issues raised and the critical pronouncement made by various High Courts in the matter.

That there was proof of technical Glitch In numerous cases where genuine taxpayers were not allowed to file a revised TRAN-1 form in such cases the department expecting the taxpayers to record their technical glitch and refuse them for filing revised TRAN-1 form.

Imposing stringent timelines is unreasonable and ultimately leads to deprivation of credit to such registered person.

There is no term ‘technical glitch’ defined in the GST Act or Rules made thereunder. However, the GST Network and the department in the shadow of “technical glitch” are making the taxpayers suffer.

Many Hon’ble High Courts have taken the view that, the mere fact that the taxpayers cannot establish that the inability to upload the required details or revise the same was on account of a system error that was occasioned by the GST Authorities, cannot be a reason for denying the substantive benefit of carrying forward the credit earned under the erstwhile regime.

In view of the GST regime and the IT platform being new, it may not be justifiable to expect the users to back up digital evidence.

Form should not preclude taxpayers from having claims examined by the authorities in accordance with law.

The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing CENVAT credit rules is a vested right.

The Revenue was having complete record of already registered persons and at present they are free to verify fact and figures of any Petitioner.

That the time limit of 90 days prescribed in Rule 117 of the CGST Rules is not mandatory but directory in nature.

 The law should provide for a remedial avenue. The stand of Central Government, focusing on condemning the Petitioner for the clerical mistake and not redressing the grievance, is unsavoury and censurable. The necessary Forms under GST are difficult to identify, and the Government had to put efforts to assist the citizens in understanding the procedures.

The government has not ascribed any meaning to the words ‘technical difficulties on the common portal’ and it cannot be interpreted in a restrictive manner. Both the Act and Rules do not provide any specific consequence on failure to adhere to the timelines.

Interpreting the procedural timelines to be mandatory would run counter to the intention of the legislature and defeat the purpose for which the transitionary provisions have been provided and have to be construed as directory and not mandatory.

It is not in dispute that there have been numerous glitches on the GST Portal in making it difficult for uploading of the TRAN-1 Forms.

The right to carry forward credit is a right or privilege, acquired and accrued under the repealed Central Excise Act, 1944 and it has been saved under Section 174(2)(c) of the CGST Act, 2017 and, therefore, it cannot be allowed to lapse under Rule 117 for failure to file declaration form GST TRAN-1 within the due date, i. e. 27.12.2017.

The due date contemplated under Rule 117 of the CGST Rules to claim the transitional credit is procedural in nature and thus merely directory and not a mandatory provision.

THE HON’BLE SUPREME COURT PUTS THE ISSUE TO REST BY ORDERING PORTAL TO BE REOPENED FOR FILING TRAN1

The Hon’ble Supreme Court of India in a landmark judgement ordered for the portal to be opened up for a period of two months providing one time opportunity of claiming transitional credit by way of a decision in the case of Falco Trade Centre.

While the Apex court ordered the portal to be opened up, w.e.f. 01.09.2022 to 31.10.2022. the UOI has made a subsequent request to enable the portal to be opened on 01.10.2022.

It is open to any aggrieved registered assessee to file the relevant form or revise the already filed form.

GSTN must ensure that there are no technical glitches during the said time.

The concerned officers are given 90 days thereafter to verify the veracity of the claim/transitional credit and pass appropriate orders thereon on merits after granting appropriate reasonable opportunity to the parties concerned.

CIRCULAR ISSUED IN LINE WITH DIRECTIONS OF SUPREME COURT ORDER

Circular No. 180/12/2022-GST, dated 09.09.2022 was issued to lay down the guidelines for filing or revising the earlier filed TRAN-1 and TRAN-2 during the period made available i.e., 01.10.2022 to 30.11.2022 in line with the directions of the Hon’ble Supreme Court.

The essence of the circular is as follows:

• An applicant may file declaration in FORM GST TRAN-1/TRAN-2 or revise earlier filed TRAN-1/TRAN-2 duly signed or verified through electronic verification code on the portal.
• This would be a one-time opportunity for applicants to either file the said forms, if not filed earlier, or to revise the forms earlier filed, and no such facility shall be made available subsequently.
• It is clarified that those registered persons, who had successfully filed TRAN-1/TRAN-2 earlier, and do not require any revision in the same, are not required to file/ revise TRAN-1/TRAN-2 during this period from 10.2022 to 30.11.2022.
• The Applicants whose application in FORM GST TRAN-1/TRAN-2 filed earlier, are pending as part of adjudication/ appeal proceeding:
  • Shall pursue the said adjudication/ appeal.
  • Shall Not file a fresh declaration in FORM GST TRAN-1/TRAN-2, pursuant to the special dispensation being provided vide this circular,
• The applicants shall, at the time of filing or revising the declaration in FORM GST TRAN-1/TRAN-2, upload on the common portal a declaration in Annexure ‘A’ [Detailed below].
• The applicants shall submit self-certified copies of the following to the jurisdictional tax officer within 7 days of filing of FORM TRAN-1/TRAN-2 on the portal:
  • TRAN-1/TRAN-2 filed
  • Declaration in Annexure ‘A’
  • TRANS-3, wherever applicable, [Detailed below].
• The applicant may be required to produce the requisite documents/ records/ returns/ invoices in support of their claim of transitional credit before the concerned tax officers for verification of the claim.
• After the verification of the claim, the jurisdictional tax officer will pass an appropriate order thereon on merits after granting appropriate reasonable opportunity of being heard to the applicant.

Clarification on specific scenarios:

• Applicants filing FORM GST TRAN-2 shall file the entire claim in one consolidated FORM GST TRAN-2, instead of filing the claim tax period wise and the last month of the consolidated period for which the claim is being made shall be mentioned in the column ‘Tax Period’ in the FORM.
• The applicants claiming credit based on Credit Transfer Document (CTD) [Table 7A of FORM GST TRAN-1] are required to upload the copy of TRANS-3, containing the following details [Notification No. 21/2017-CE (NT) dated 30.06.2017.]:
  • GSTIN of the manufacturer issuing CTDs
  • Total no. of CTD received
  • of invoices against which CTDs have been issued
  • Total quantity for which CTD issued
  • Total value of Goods for which CTD has been issued
  • Central Excise duty paid on such goods
  • Credit availed by the dealer
• No claim for transitional credit shall be filed in respect of such C-Forms, F-Forms and H/I-Forms which have been issued after the due date that was prescribed for submitting the declaration in FORM GST TRAN-1 i.e., after 27.12.2017 [Table 5(b) & 5(c) of FORM GST TRAN-1]

ANNEXURE A

Information to be furnished in the Declaration to be uploaded by Applicants along with TRAN-1/TRAN-2:

• Name of registered person and Style of Business:
• GSTIN:
• Name and designation of person making this declaration on behalf of the registered person
• Registration effective from: (specify Date)
• Details of TRAN-1/TRAN-2 furnished earlier:
  • Date of furnishing TRAN-1
  • Date(s) of furnishing TRAN-2
  • Amount of credit claimed earlier through TRAN-1
  • Amount of credit claimed earlier through TRAN-2
  • Reference number and date of notice/ order u/s 73/74 of CGST Act,2017 issued in respect of the credit availed.
  • Amount of credit determined as in-eligible, if any, vide such order(s)
  • Amount of credit determined as in-eligible, vide disposal of appeal preferred u/s 107 of CGST Act/ petition before Hon’ble High Court
• Amount of credit claimed through TRAN-1/TRAN-2 being filed now
• Date of issuance of notice/ passing the order, if any, under existing law with regard to admissibility of the credit claimed as transitional credit
• Amount of credit claimed in TRAN-1/TRAN-2 disputed/ held as in-admissible under existing law vide such notice/ order.

ILLUSTRATIONS OF ISSUES FACED PERTAINING TO TRANSITION OF CREDIT IN ERSTWHILE LAWS INTO GST ECOSYSTEM AS ITC

1. Credit Transitioned in ISD Registration stuck

The Credit transitioned through TRAN 1 filed in the ISD GSTIN was not being apportioned to different GSTINs due to system error. The Credit remains in the Electronic Credit Ledger of the ISD without any mechanism for utilisation or apportionment since the same cannot be transferred through GSTR-6.

2. Transition of credit of EC, SHE and KKC into CGST.

The section 140 was retrospectively amended w.e.f. 01.07.2022 by s.28 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018) – Brought into force w.e.f. 01st February 2019. The words ‘of eligible duties’ were added to after CENVAT Credit to restrict the availment of the above cesses.

3. Excess Credit may have been transitioned and apportioned by the Taxpayer in the TRAN 1 filed. These claims may be identified by the Taxpayer themselves or by the Department as excess claims. There is ambiguity in the treatment to be done if the Credit is already transitioned to multiple locations.
4. Where the Companies have missed out to transition a portion of erstwhile credit into GST through TRAN 1, a portion of the same may have been availed through GSTR-3B directly.
5. Taxpayers may have missed out to transition the entirely of the available credit, either in the Original TRAN Forms or the Revised TRAN Forms
6. The TRAN 1 could not be filed by many taxpayers within the due date due to glitches in the system.
7. In respect of CENVAT Credit on RCM items for which Service Tax was payable on 5th or 6th July 2017, Certain taxpayers may have directly availed the same in the TRAN -1 form since ST-3 for a period before July 2017 should not be able to disclose and avail the ITC. However, pursuant to Circular issued dated 28.09.2017, the CENVAT on RCM was also required to be disclosed in the ST-3 and the CENVAT transitioned as balance of CENVA Credit carried forward in return.
   Since the amount was considered in TRAN-1, the revised ST-3 would not have disclosed the same. Later if the amount transitioned was disputed the taxpayers would be required to reverse the CGST pertaining to this amount.
8. In certain cases, the Taxpayers are aware of RCM payments missed out at a later date. The possibility of transitioning the RCM paid after due date of ST-3 revision and TRAN is not clear.
9. Certain taxpayers due to the fact that part of the TRAN Credit is under contention may have reversed the same.
10. Taxpayers who have received capital goods on or after 01.07.2017 are unable to transition the credit on the same to GST

FLOW MAPPING OF THE WAY FORWARD

Category 1:

Registered persons who have successfully filed TRAN-1/TRAN-2 earlier are not required to file/ revise TRAN-1/TRAN-2 during this period from 01.10.2022 to 30.11.2022.

Category 2:

Cases where Transition credits are pending as part of adjudication/ appeal proceeding:

Category 3:

Common procedure for Filing fresh Tran-1/Tran-2 or revision of Tran-1/Tran-2 filed earlier:

Category 3.1:

Cases where TRAN-1/TRAN-2 has been filed and being revised:

NOVELLO COMMENTS:

With the reopening of the GSTN common portal for filing forms for availing Transitional Credit through TRAN-1 and TRAN-2 for two months i.e., w.e.f. 01.09.2022 to 31.10.2022. on the direction of The Supreme Court of India, India Inc. has a golden opportunity to file or revise their TRAN-1 and TRAN-2 for availing transitional credit in case of non-filing or a lesser claim made earlier.

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