Transitional Provisions

GST is a reality

Touted as a landmark reform, GST, which is an amalgam of
around 14 indirect taxes is a reality and is all set to be effective from 1^st
July 2017. The transition to GST from a plethora of existing indirect
taxes (“existing laws”) would necessarily entail challenges since not only the
legislations are different but even many of the fundamental concepts of
taxation are different.

In order to ensure a smooth transition and to keep such
challenges at the bare minimum, the GST Laws provide for various provisions
relating to transition. Such provisions are enshrined in Chapter XX of the CGST
Act. More or less similar provisions are contained in the SGST Laws as well. In
view of section 20 of the IGST Act, the transitional provisions of CGST Act
would apply to IGST Act as well.

Summary of the Transitional Provisions

The following table provides a
bird’s eye view of the statutory provisions dealing with transition from
existing laws to the GST Laws.

Scope of this Article

As can be seen from the
above table, there are multiple provisions dealing with issues surrounding
transition. Further, many situations have not been envisaged. Broadly, the
provisions relating to transition can be divided into provisions dealing with
output taxes, provisions dealing with input credits and procedural matters.

In view of the size
constraints, this article deals with transitional provisions in relation to
output taxes and input credits. For transition provisions related to procedural
matters like registration, refunds, etc., the readers may look up to the
relevant sections.

Repeal and Savings

Section 174 of the CGST
Act repeals various existing laws from the date of commencement of the Act. At
the same time, it is also provided that the repeal of the said laws shall not
impact certain proceedings, rights and obligations already accrued under the
existing laws. Further, it is also stated that the general application of
section 6 of the General Clauses Act, 1897 is not impacted due to section 174.

The proviso to
section 174(2)(c) specifies that any tax exemption granted as an incentive
against investment shall not be treated as a privilege and accordingly, the
savings clause shall not apply. In the case of Shrijee Sales Corporation vs.
Union of India 1997 (89) E.L.T. 452 (S.C.), the Supreme Court held that
though the principle of promissory estoppel is applicable against
Government, in case of supervening public equity, the Government is allowed to
change its stand and can withdraw a time-bound exemption notification prior to
its expiry.

The above proviso
and the decision may become very relevant in understanding situations where
long term exemptions provided for investment in backward areas have already
been granted under the existing laws and not continued under the GST Law.

Taxable Event and
Collection of Duty/Tax

Section 3(1) of the
Central Excise Act, 1944 levies an excise duty on all goods manufactured in
India. Rule 9 requires the payment of duty at the time of removal of the said
goods. In this context, the Supreme Court in the case of CCE vs. Vazir
Sultan Tobacco Co. Limited 1996 (83) E.L.T. 3 (S.C.) has observed that
section 3 cannot be read as shifting the levy from the stage of manufacture or
production of goods to the stage of removal, that the levy is and remains upon
the manufacture or production alone and only the collection part of it is
shifted to the stage of removal

Accordingly, in the
context of special excise duty, the Court held that

The goods produced prior
to the date of the levy were not subject to such levy. If that is so, the levy
cannot attach nor can it be realised because such goods are removed on or after
the date of the levy

Goods manufactured during
the impost of levy but cleared after the lapse of levy would be liable for duty
at the rate and valuation in force as on the last date of levy.

Similar principles would
apply in the context of service tax where the taxable event u/s. 66B is on the
provision of service whereas the time of collection is defined through the
Point of Taxation Rules, 2011. However, in the context of VAT, generally the
taxable event as well as the collection is aligned to be at the time of
transfer of ownership in the goods.

While the GST Law provides
for repeal of the existing laws, it does not explicitly contain any provision
for extinguishing the liability already created under the existing laws. This
would imply that in cases where the taxable event is under the existing law,
the liability to pay tax continues under the existing law and is not exhausted
by payment of tax under the GST Law.

Services provided before
the appointed date but POT arises under the GST Regime

Rule 3 of the Point of
Taxation Rules, 2011 defines the point of taxation to be the date of issuance
of invoice if the same is issued within 30 days from the date of completion of
service. A testing agency issues a certificate of quality on 26^th
June 2017 and issues an invoice on 2^nd July 2017. In view of the
principles illustrated above, the testing agency will be required to discharge
service tax on the said transaction since the taxable event of rendition of
service is completed when the levy of service tax was in force. Section 142(10)
of the CGST Act will not come to the rescue of the agency since the said
provision applies only for supplies after the appointed date. Of course,
section 140(5) of the CGST Act will permit the credit of the service tax to the
recipient if the transaction is recorded in his books of accounts before 30^th
July 2017. For the said purpose, the phrase “services received on or after the
appointed date” will have to be read as “invoices received on or after the
appointed date” to make the provision operational.

A construction contractor
provides a continuous service to his clients. In view of the proviso to
Rule 3 of the Point of Taxation Rules, 2011, each event which requires the
receiver of service to make any payment to service provider (‘payment
milestone’) is deemed to be completion of the service to that extent. In a
particular instance, the construction contractor may have performed partial
work but the milestone may not be triggered on 30^th June 2017. In
such situations, since the deemed completion of service is not triggered at
all, the levy does not crystallise in the service tax regime and the
construction contractor may bill under the GST law with applicable GST. This
would also be in alignment with the provisions of section 142(10) of the CGST
Act.

A manufacturing company
avails the services of an advocate on 2^nd June 2017. The said
services are covered under reverse charge mechanism under the service tax law.
The payment to the advocate is made on 12^th August 2017. Rule 7 of
the Point of Taxation Rules, 2011 defines the point of taxation in case of
reverse charge mechanism to be the date of payment if the payment is made
within three months from the date of invoice. In this case, since the services
were rendered in June, the liability to pay service tax arises. The said
liability is payable for the month of August 2017 and needs to be discharged by
6^th September 2017. Unluckily, there is no provision
permitting the credit of such service tax paid.

In case of import of
services, section 21 of the IGST Act becomes relevant. The said provision
requires the payment of GST for import of services made after the appointed
date regardless of whether the transaction had been initiated before the
appointed date. However, the term ‘import of services made’ has not been
defined and therefore the interpretation of the said term may result in
litigation.

POT exhausted under the
existing laws, but supplies made after the appointed date

A converse situation can
arise in the context of goods and services where advances are received or
invoices are raised prior to 30^th June 2017 but the actual supply
happens under the GST Regime. In such situations, the correct trigger point of
taxation would be GST and not the existing tax requiring the assesse to file a
refund claim for the existing tax and further liability towards payment of GST
under the GST Law. However, in order to ease the process, Section 142(11)
provides for a transitional benefit under the GST Law.

Section 142(11)(a) states
that no tax shall be payable on goods under the GST Act to the extent that the
tax was leviable under the VAT Act of that State. Similarly, Section 142(11)(b)
states that no tax shall be payable on services under the GST Act to the extent
that the tax was leviable under the service tax law.

Section 142(11)(c) further
states that where tax was paid on any supply both under the Value Added Tax Act
and under the service tax law, GST shall be payable to the extent of supplies
made after the appointed day and the taxable personshall be entitled to take
credit of value added tax or service tax paid earlier

Subsequent Adjustments

It is likely that for a
supply effected in the pre-GST regime, there could be some variation in the
value of taxable service or value of goods on account of discount, etc. In such
cases, since the taxable event was under the existing law, the differential tax
should be payable under the existing law. However, as a transition provision,
Section 142(2) permits the issuance of a debit/credit note under the GST Regime
and such debit/credit note is deemed to have been issued in respect of an
outward supply under the GST Regime. This provision permits an adjustment on
account of GST for supplies which initially attracted VAT/Excise Duty/Service
Tax. Though no corresponding amendment is carried out under the existing laws
to insulate against the liability for the said debit notes, it can be said that
section 142(2) will have an overriding effect over the provisions of the
existing laws.

A downward adjustment of
tax consequent to the issuance of a credit note is permitted u/s.142(2)(b) only
subject to a corresponding reduction of input tax credit by the recipient. In
cases where the recipient was not eligible for input tax credit under the
existing laws, it is very likely that he will not agree for such a reduction in
his input tax credit. In such situations, will it be open for the supplier to
disregard the provisions of section 142(2)(b) of the CGST Act and invoke the
provisions of Rule 6(3) of the Service Tax Rules, 1994 and file a consequent
refund claim? In view of the legal principles enunciated, it is felt that such
an approach may be feasible.

Most of the current VAT
Regimes permit an adjustment on account of goods rejection if the rejection
happens within a period of six months. Section 142(1) reiterates the
eligibility of refunds under the existing law in case of goods rejection from
unregistered buyers. In fact, the said provision would also permit entitlement
of refund for excise duty. To that extent, the said provision is in alignment
with the legal principles. However, through a proviso in the said
section, it is stated that if the goods are returned by a registered person,
the return of such goods shall be deemed to be a supply. Can this proviso create
a tax liability on the person who is returning the goods? Further, can it override
the express provisions under the existing laws permitting the adjustment on
account of goods rejection in all cases?

Transitional Arrangements
in respect of input tax credit

Section 140 deals with
various situations where transitional arrangements are made for claim of
credit. The essence of the said provisions is covered in subsequent paragraphs.

Section 140(1) permits a
registered person to claim the CENVAT Credit carried forward in the last return
under the existing law. The Credit can be carried forward subject to certain
conditions. Similarly, the unutilised input tax credit disclosed in the VAT
Returns can be carried forward subject to certain conditions, one of which
pertains to receipt of all pending declarations.

Section 142(9)
specifically deals with situations of revised returns and states that any
increase in CENVAT Credit consequent to a revised return will not be carried
forward under GST, but be eligible for cash refund under the existing law. Will
this beneficial provision permit a back door entitlement for entities
accumulating substantial CENVAT Credits and unable to utilise the same?

Section 140(2) permits the
claim of unavailed credit on capital goods in cases where the credit under the
existing laws is available in instalments.

Section 140(3) is an
important provision permitting the claim of credit of eligible duties in
respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the appointed day subject to various conditions
mentioned therein. The credit is available to a registered person, who was not
liable to be registered under the existing law, or who was engaged in the
manufacture of exempted goods or provision of exempted services, or who was
providing works contract service or a first stage dealer or a second stage
dealer or a registered importer or a depot of a manufacturer.

It may be noted that one
of the important conditions for the claim of credit is that the said registered
person is in possession of invoice evidencing payment of duty under the
existing law in respect of such and that such invoice is issued not earlier
than twelve months immediately preceding the appointed day.

In cases where the person
is not in possession of a duty paying document, a proportionate credit linked
to the output tax liability under the CGST Act has been prescribed through the
Transitional Rules. Similarly, in certain cases, the manufacturer is permitted
to issue a Credit Transfer Document to enable the person possessing the goods
to claim the credit on the basis of such document.

Section 140(9) permits
recredit of service tax credit already reversed under the existing law on
account of non-payment to vendors. The said re-credit will be available if the
value and the tax is paid to the vendor within 3 months from the appointed
date.

Section 140(5) permits a
credit of eligible duties and taxes in respect of inputs or input services
received after the appointed date if the said transactions are recorded in books of
accounts within 30 days from the appointed date.

Conclusion