The purpose of this article is to discuss the availability of input tax credit ('ITC') to traders with respect to unsold stock as on the appointed date. The article covers the scenario where credit on the unsold stock was restricted under the current tax regime (e.g. credit of Central Excise or Countervailing Duty ('CVD') to traders) but would be chargeable to GST when sold.
The part-I of the article deals with the situation where a trader is in the possession of invoice/prescribed documents evidencing payment of duty. The availability of credits on a notional basis where such documents are not available, would be discussed in Part-II of this article.
Relevant transition provision in this regard is Section 140(3) of the Central Goods & Service Tax Act, 2017 ('the CGST Act'). This section enables registered persons under GST to claim credits of eligible duties [1] (which includes Central Excise or CVD) in relation to inputs [2] lying in stock as on the appointed date (hereinafter referred to as 'ITC on unsold stock').
To put this into perspective, let's take an example of a wholesale dealer of chairs who has an unsold stock worth INR 1,12,500 including Excise duty component of INR 12,500, as on the appointed day. Since he is not eligible to claim excise duty credit under the current tax regime (being a trader), the same becomes cost of the chairs. Since, the wholesale dealer will be liable to GST when these chairs are sold under the GST regime, the transition provisions provide for ITC of Excise duty of INR 12,500 paid by him if he falls under any of the specified categories.
As per Section 140(3) of the CGST Act, following specified persons can claim ITC on unsold stock subject to the fulfilment of prescribed conditions:
- who were not liable to be registered under the existing law, or
- who were engaged in the manufacture of exempted goods or provision of exempted services, or
- who were providing works contract service and were availing of the benefit of notification No. 26/2012—Service Tax, dated the 20th June, 2012 or
- first stage dealers or
- second stage dealers or
- registered importers or
- depots of manufacturers
In light of above, let's examine whether an Importer-trader (including a depot), as well as a Domestic-trader, would fall under one or more of these categories and, therefore, would be eligible to take ITC on unsold stock under GST.
A. Importer-trader (including the depot of Importer-trader)
Eligibility of Importer-trader can be examined under the following relevant categories:
1. Person who was not liable to be registered under the 'existing law'
Under Section 2(48) of the CGST Act, 'existing law' has been inter-alia defined to mean the law relating to levy and collection of duty or tax on goods or services or both passed before the commencement of this Act by the Parliament.
On a bare reading of the above definition, it is apparent that any law passed by the Parliament for levy of tax on goods or services, irrespective of its scope, would get covered in the meaning of 'existing law'.
Accordingly, even the Central Sales Tax Act, 1956 ('the CST Act') passed by the Parliament for the levy of tax on the inter-state sale of goods would get covered under the ambit of the phrase 'existing law'.
Thus, on a literal interpretation, any Importer-trader who is liable to be registered under the CST Act, may not get covered under the category 'person who was not liable to be registered under the 'existing law''.
However, on a purposive construction (i.e. mischief rule of interpretation), one can argue that irrespective of the wider definition of 'existing law', it should only mean Central Excise and Service Tax related laws framed by the Parliament. Basis this interpretation, it may be possible for Importer-trader to claim that it is not liable to be registered under the existing law (which should not include the CST Act), hence, is eligible for ITC on unsold stock.
However, such position may be disputed by the tax authorities on the basis of literal interpretation of the term 'existing law' and could lead to denial of the benefit. Therefore, in order to strength the claim of ITC on unsold stock, it is important to examine the coverage of Importer-trader under other prescribed categories instead of solely relying on the present category.
2. Person who was engaged in the provision of 'exempted services'
Although prima facie the above category doesn't seem relevant for a trader, it is appropriate to discuss the same in view of definition of 'exempted services' provided under the Cenvat Credit Rules, 2004 ('the Cenvat Rules').
It is relevant to point out that the phrase 'exempted services' is not defined under the CGST Act or Integrated Goods and Services Tax Act, 2017 ('the IGST Act'). Thus, one needs to resort to the rules of interpretation to understand the scope of the term 'exempted services'.
For the relevant interpretation rule in such circumstances, various courts have held that in case a word acquires a technical meaning because of its consistent use by the Legislature in a particular sense, it should be understood in that sense when used in a similar context in subsequent legislation [3].
Therefore, in the absence of any specific definition under the GST laws, it is safe to borrow the definition [4] of 'exempted services' from the Cenvat Rules for the purpose of CGST Act.
Under the Cenvat Rules, 'exempted services' include those 'services' on which no Service tax is leviable under Section 66B of the Finance Act, 1994 ('the Finance Act').
Under Section 66B of the Finance Act, Service tax is leviable on all services other than those specified in the 'negative list' of services. The negative list of services, prescribed under 66D of the Finance Act, covers the activity of 'trading of goods'[5]within its ambit.
In this view of the matter, a person carrying out the activity of 'trading of goods' can be said to be engaged in provision of 'exempt services'.
Thus, it can be argued that an Importer-trader is a provider of 'exempted services' and hence eligible to claim the ITC on unsold stock.
However, this position can also be litigated by the tax authorities on the ground that on a literal interpretation of the provision, a person exclusively engaged in trading activity cannot qualify as a service provider dealing in exempted services.
Therefore, in order to further strength the claim of ITC on unsold stock, the importer-dealer may consider obtaining importer registration under Central Excise laws, as discussed below.
3. Registered Importer
The term 'registered importer' is not defined under the CGST law. Since registered importer is a technical term and cannot be understood by applying the principle of literal interpretation, even this term needs to be understood in the context of existing law, i.e. Central Excise laws as well as the Cenvat Rules, by applying the mischief rule.
Under the existing law, a 'registered importer' is understood to be a person who imports goods from outside India and is registered under the Central Excise laws for the purpose of passing the benefit of Cenvat credit to buyers.
Thus, to ensure the availability of ITC on unsold stock, an importer-trader may consider obtaining an 'importer registration' (if not already registered) under the Excise laws and undertake requisite compliances.
Once this process is undertaken, an importer-trader should be able to take ITC of entire CVD paid on imported goods procured within 12 months and lying in stock as on the appointed date.
B. Domestic traders
The above discussion under A(1) and A(2) would also hold good for Domestic traders (assuming such traders are registered under CST law) and are holding a Cenvatable invoice/ prescribed documents.
As the coverage under the categories A(1) and A(2) may be disputed by the tax authorities, such traders may consider obtaining registration as First Stage Dealer ('FSD') in order to strengthen the eligibility to claim ITC on unsold stock as FSD registration can be obtained by any dealer who purchases goods directly from an importer or a manufacturer through Excise invoice.
The above mechanism may also be considered for other trade partners in the supply chain who may avail ITC on unsold stock basis Cenvatable invoice issued by the importer/ first stage dealer/ second stage dealer, in order to ensure there is no blockage of ITC in the entire supply chain.
Conclusion: The transition provisions under GST with respect to ITC on unsold stock is prone to multiple interpretation. Therefore, traders should try to get themselves covered under the maximum possible specific categories as discussed above, so as to strengthen their claim of ITC on unsold stock on an actual basis. This will help them to maximize the transition credit on their unsold stock.
[1] Explanation 1 to Section 140 of the CGST Act
[2] As per Section 2(59) of the CGST Act, input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Considering such wide definition of 'input', it is safe to take a position that it would also include traded goods as the same are used for business.
[3] Her Highness Ruckmaboye v. Lulloobhoy Motichand, (1851-52) 5 MIA 234, pp. 250, 260 (PC); Commissioner of Special Purposes of Income Tax V. John Frederick Pemsel, (1891-94) ALL ER Rep 28, p.54 (HL); State of Madras v. Gannon Dunkerly & co. AIR 1958 SC 560
[4] Rule 2(e) of the Cenvat Rules
[5] Clause (e) of Section 66D
By: Rashmi Kedia (Partner, Reina Legal) and Harsh Bhatia (Principal Associate, Reina Legal)
CAclubindia
