Transition of credit of tax paid on capital goods in Pre-GST regime

Transition of credit of tax paid on capital goods in Pre-GST regime by units in Excise Exempted  Zones (Area Based Exemption):

The advent of GST with effect from 01.07.2017, brought no happiness to the units which are operational in Excise Exempted Zones. Before 01.07.2017, the units were eligible to take credit of tax paid on capital goods in terms of Rule 6(4) of Cenvat Credit Rules, 2004 as amended with effect from 01.03.2016 vide Notification 13/26-CE dated 01.03.2016but after lapse of two years from the date of commencement of production or from the date of installation of such capital goods. This provision came into force with effect from 01.03.2016 and therefore, none of the units in Excise Exempted Zones got an opportunity to avail the credit due to advent of GST law with effect from 01.07.2017. However, those who procured capital goods after 01.03.2016 till 30.06.2017, are in a fix as to whether they can make use of transitional provisions in the GST law to transfer the credit to the GST regime.

Section 140(2) of CGST Act, makes transitional provision in respect of availment of ITC of tax paid on capital goods in the pre-GST regime. This is a general provision with regard to capital goods for the transition of credit availed of tax paid on capital goods during the Pre-GST regime, into GST regime. This section does not specifically refer to the transition of credit by the units established in area-based exemptions into the GST regime.

The facility of transitional credit is allowed subject to the condition incorporated in the proviso which reads as below:

'Provided that the registered person shall not be allowed to take credit unless the said credit was admissible as a Cenvat credit under the existing law and is also admissible as input tax credit under this Act.'

From the above proviso, it is clear that the registered supplier before taking the credit on capital goods needs to demonstrate two things, as mentioned below:

1. The credit on capital goods was admissible in the existing Central Excise law/Rules and
2. The credit is admissible as ITC in terms of GST law.

We can examine both the above-mentioned aspects one by one.

Coming to the first point as to whether the transitional credit was admissible as credit on capital goods in the Pre GST regime to the unit, it is seen that these units are availing exemption under Notification 50/2003-CE dated 10.06.2003, which provides for exemption to the goods from payment of duties on goods manufactured and cleared by the units established in the specified geographical areas. This notification does not incorporate any condition/restriction for admissibility of credit of tax paid on capital goods, for availing the exemption.

Now let us see whether Cenvat Credit Rules bar availing of credit of tax paid on capital goods, to such unit in any manner, in the Pre-GST regime?

It is seen that Rule 6(4) of Cenvat Credit Rules made a provision for availment of credit of tax paid on capital goods after this Rule was amended vide Notification 13/26-CE dated 01.03.2016.  Through this amendment, the general bar of availment of credit of tax paid on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, has been removed. The amended Rule 6(4) provides for ineligibility of credit of tax paid on capital goods, only for the first two years. It means that the cenvat credit would be admissible after the period of two years from the date of commencement of production or from the date of installation as the case may be.

In my view, with this amended provision, the govt. has clearly manifested its intention to allow credit of tax paid on capital goods even when these capital goods are to be used exclusively for exempted goods or for provision of exempted services though after lapse of two years. This is clear departure from the general principle of admissibility of credit of tax paid on capital goods incorporated in Rule 6(4) of Cenvat Credit Rules, 2004, which all along has been clamoring that no CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providingexempted services.

Now we may examine as to whether the credit on capital goods, lying in Cenvat kitty as on 01.07.2017, is in harmony with the provision of GST law?

Section 16 of CGST Act, which is applicable to both kinds of supplies whether of capital goods or goods as such, lays down condition to the extent that the capital goods should be used in the course of or in furtherance of business before credit on such capital goods is taken. The burden of proof is on the unit that the credit is in the course or in furtherance of business. This should not be difficult for any unit to demonstrate, since all the units in Excise Exempted Zones are in manufacturing activity.Further, the credit apparently, is also not barred by section 17(5) of CGST Act, 2017 also.

In view of the above, the units can avail the transitional provision contained in section 140(2) with regard to the credit of tax paid on capital goods imported or otherwise, since the same is admissible in the Pre-GST regime and also in the GST regime as discussed above.The credit is substantive right of the unit and the same cannot be defeated without specific provision in law.The GST law has not made any provision barring availment of credit on capital goods procured before 01.07.2017.

However,availmentof credit, at this stage, may be irregular, since Rule 6(4) of Cenvat Credit Rules, 2006, allows credit of tax paid on capital goods after two years of commencement of production or their installation.However, this technical requirement cannot prevail over the substantive right of availment of credit which is otherwise admissible in law.

These units can avail of ITC on purchase of capital goods on or after 01.07.2017 in terms of GST law.

Disclaimer: The views expressed above are strictly personal. The content of this document are solely for informational purpose. It doesn't constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon.