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The proforma credit for some inputs in its initial form has grown to Modvat (1987), expanded to dealers / capital goods (1994) Cenvat (reduced permissions intimations), VAT (2003-2009- States) Service Tax credit for manufacturers and excise for service providers in 2003/4 was further expansion. After this for a decade now slowly some restrictions in VAT as well as Cenvat Credit have been observed to be increasing. GST came with a promise of no cascading and seamless credit. However the credit provisions cut pasted from the Cenvat Credit and VAT provisions without the rules in place, indicates that full credit would be a mirage.

It looks like the revenue department is making sacrifices and then they will allow concessions to the tax payer. It has been forgotten that the tax payer pays the salaries of the VAT, Excise and Service Tax officers and fees for the consultants and professionals. The law is being drafted to capture the law evader- for this the tax compliant will incur high cost, cumbersome procedures, illogical credit denial and still has to keep in touch with the “babus”. The ITC rules are still to come- God knows how much more unpleasant surprises are in store for the businessman.

Some of the restriction in brief are as under (tried to put in order of impact):

1. Capital goods, inputs and services consumed for 5 petroleum products and electricity as not in GST. Major cascading- anomaly can be removed in short time but States and Centre who are enjoying the very high rate of tax collection presently totally in their control may not be willing. Cap in the %age  of tax preferable (ED 12.5% and VAT 15%)  Electricity is used for commercial purposes and the investment in new projects is substantial. All this credit is not passed on though the cost is passed on to industry.

2. Supplier default by way of incorrect uploading, non payment of short payment of total dues- leads to full denial of credit for recipient. This will also be before the high courts in May/ June and SC in another 2 months as no man can be made to pay for another man's error. If govt is not capable of collection of taxes from errant tax payers why it has to go behind the compliant.

3. Carry forward: only credit eligible in pre GST regime allowed- trader cannot get the excise & service tax credit; service provider cannot get vat and if under abatement then even excise credit not available. There are several methods by which the credit can be ensured. It is certain all those ways will be used. It would be graceful for Govt to accept and make it reasonable that when more taxes are being collected at the next stage, tax credits due to be provided fully. This may impact the Govt. inflow for 1- 3 months. It would demonstrate trust and fairness on the part of the govt.  

4. SGST credit in State where not registered not available. Ex- accommodation, hall rent, restaurant, personal grooming, beauty treatment, health services, event services, supplies on board a conveyance, prepaid telecom/ internet services. This will cause heart burns when the legitimate business expenditure suffer GST but credit is not available. All B2B supplies should be based on the place of the recipient.

5. SGST credit not usable for CGST and vice versa: This should have the problem but has been put in the assessees lap. This would ensure that the impact of tax would still decide the location as if one has an accumulation of tax in one place and is paying taxes in other regions- it would not be a business at all.

6. Credit on stocks - vat credit on stocks with service provider not available; excise credit on stock with trader not available. The new regime will need GST to be paid. Not giving full credit by limiting credit available in earlier regime is UNFAIR and against the principle of seamless credit. A service provider can register under VAT, a trader can register under central excise in the month of March and would be eligible for the credit on the stocks in hand- legally nobody can deny. Then why such artificial barriers created for which solutions are also  known to the drafter is a question which defies logic.

7. Old restrictive definition of capital goods carried forward: GST started with an assurance that restrictive provisions under the old law would al be a measure of the past. Diligently carrying forward the restrictions in then Model law with more rules to restrict expected. Not much to cheer in this direction for the tax payer. Old wine in new bottle

8. Credits on tax paid personal use is not available!! Govt collects tax on personal supply- in which case it is a taxable supply then why deny credit. In central excise law- a decade back the provision was there that is value of accessory include in the value of removal then credit available. Sound principle- cannot deviated as it would be challenged and is not fair.

9. More in fine print of rules… the devil is still to be seen.

If seamless credit is not put in place the objective of no tax on tax and reduction in cost of products and services would not be fully met. Then GST at most will become as propounded by some ONLY a NAME CHANGER. Hope the drafters of the law prove us wrong.

The author can also be reached at


Published by

Madhukar N Hiregange
(Chartered Accountant)
Category GST   Report

2 Likes   34 Shares   10905 Views


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