TRANSITION PROVISION UNDER GST

India has replaced its complex tax structure with a Goods and Services Tax (GST), which was introduced with an aim of unifying the country’s entire tax structure. Since its implementation, India has moved from multiple taxes like VAT and Service Tax to Excise Duty to a single tax regime. The transition provisions under GST were designed to facilitate a smooth shift from the earlier tax laws to the new GST framework. As these are provisions that businesses need to be able to carry forward existing tax credits under the new system, particularly input tax credits. This article will explore the key aspects of the transition provisions under GST, including eligibility, procedures, and benefits.

Key Takeaways:

• Under GST, businesses can carry forward input tax credits from the previous tax regime, through transitional provisions.
• The law governing the rules of transferring credits, stock and capital goods come under section 140 of GST Act.
• To claim transitional credit it is required to file GST TRAN-1 within 90 days.
• As per business, they can claim CENVAT/VAT credit and stock in hand at the time of transition.
• Filing GST returns in time is key to an easy transition and compliance.

• It’s the transitional credit which ensures that businesses do not suffer financial burden with the GST switch.

What are Transition Provisions under GST?

Transition provisions under GST allow businesses to carry forward their tax credits and liabilities from the earlier tax regime into the new GST system. Their purpose is to prevent businesses from losing any valid credits in the wake of tax law changes. Especially important are, transition provisions which are with respect to the current indirect tax, issues related to input tax credit (ITC) as well as other tax related matters which are present in the old indirect tax regime i.e., Service Tax and Value Added Tax.

The transit provisions assist in making up for the earlier law and GST regime. It is how they deal with tax that was paid on inventory, capital goods and services procured before the appointed day and not wholly consumed. Businesses are allowed to claim transitional credit of input tax credit available under previous tax laws of the country.

Key Aspects of Transition Provisions under GST:

1. Transitional Credit under GST:

One of the most critical aspects of the transition provisions under GST is the carry-forward of transitional credit. In other words, this credit is the unutilized credit under the earlier tax regime which can be transferred to the electronic credit ledger under GST.
The transitional credit is available for:

• CENVAT Credit: On sources of credit accumulated on account of previous Service Tax legislation, Excise Duty, and VAT laws. Credit on capital goods and stock in hand at the time of transition are included in this.
• Credit on Capital Goods: Input tax credit can be claimed on capital goods purchased before the appointed day till the time when such goods are in use at the time of transition.
• Closing Balance: GST regime allows to carry forward the unutilized closing balance of CENVAT credit or VAT credit.
  Businesses should avail this credit only by submitting GST return declaring Closing Stock and Outstanding credits.

2. Eligibility to Claim Transitional Credit:

To claim the transitional credit, the following conditions must be met:

• The earlier tax laws (like VAT or Service Tax) should have been registered for the business.
• But it was so that the goods and services purchased should have been purchased before the appointed day (when the GST regime came into effect).
• There has to be proof that the business paid its taxes, such as previous regime returns, invoices or receipts.
• The entire transition should have had the credit not been used.

To ensure smooth transfer of tax credits to the new electronic credit ledger in the GST system, a business must ensure that it fulfils these requirements.

3. Procedure for Claiming Transitional Credit:

Claiming transition credit is a detailed procedure and businesses are expected to file forms as provided in the GST Act. These forms enable businesses to bring credit which was declared unused under the earlier law and carry it forward.

• Form GST TRAN-1: Under the previous tax regime, this form is used to declare the closing balance of input tax credit. You need to file the form online within 90 days from the date of GST implementation.
• Form GST TRAN-2: This form is for businesses that did not register under the earlier tax laws, and did not have a tax credit but dealt in goods.
• Form GST TRAN-3: This is the form for businesses who don’t have any physical goods to transfer, but want to claim credit for services that were previously accessible.

If any business fails to file the GST return forms on time, then they can apply for the extension but they have to fulfil the conditions of the GST Council.

4. Input Tax Credit under GST:

Earlier under the previous tax regime, businesses had the right to CENVAT or VAT credits on their purchases. In a regime of GST however, these are provided for the transition of credits under the above mentioned provisions.

The GST Input tax credit allows the business person to offset their tax liabilities against the taxable tax they have already paid on the raw materials, goods or services used for business purposes. The end result: There is a reduction in total tax burden and an efficient tax collection throughout the chain of supply. These credits get held in the electronic credit ledger and businesses pay their taxes on their GST returns by using them.

If businesses fail to adhere to the conditions of transferring input tax credit in the GST system, then, such businesses could lose out on the credits.

5. Impact on Small and Medium Enterprises (SMEs):

The transition provisions under GST have a direct impact on small and medium enterprises (SMEs). Simple, if the businesses have large amounts of inventory and have likely built up significant tax credits under the old tax laws, it seems. Without these credits, the switch to GST will be a major financial imposition.

The financial transition will be eased for such SMEs, as will continue to benefit from these credits under GST i.e. CENVAT credit or VAT credit, whichever is available. However, they have to ensure that they appropriately document such as invoices and returns to support those claims. New businesses must keep abreast of the transition process otherwise they will miss out on ineligible credits.

6. Smooth Transition and Common Challenges:

The transition provisions under GST aim to provide a smooth transition from the earlier tax regimes. The problem, however, is many businesses have a difficult time transferring credits because they’re not presented with the necessary documentation from the old system. Some common issues include:

• The wrong tax credits are recorded in earlier returns or lack of proper invoices.
• Reconciliation of credits across the old and new systems was difficult.
• GST return forms delayed filing.

To avoid penalties, as well as to maintain the business’ right to any credits, businesses are advised to keep up to date records that will facilitate timely filing of forms.

Conclusion

The transition provisions under GST are crucial for businesses to smoothly shift from the previous indirect tax systems into the new GST regime. The transition process is less burdensome as businesses are allowed to carry forward their input tax credits and other tax benefits. In order for businesses to fully use the transition provisions, it is important to do so in accordance with the requirements, submit the correct forms and have appropriate documents in place.

If businesses understand the fine grain of the transitional credit process and how to claim it, they can offset some of the potential disruption during the change. All this is done to ensure the efficiency of the tax regime, so that important tax benefits businesses can use to operate are not lost.
In summary, the transition provisions under GST enable a smoother shift into the GST regime and provide businesses with a cushion during the transition period. The aim is by adhering to the guidelines, businesses continue to enjoy the benefits of tax credits and thus help them bear the low tax strains in the new tax system.

FAQs:

1. What is Transitional Provision in GST?

An integral part of business but much more relevant in the GST Borderless territory, Transitional Provision in GST means transition from the pre-existing regime to the newly established regime. Under GST transition provisions, a business can carry forward its input tax credits and other pending claims, whatsoever it may be under the previous tax regime (such as VAT, service tax) to the new GST regime without any loss of credits.

2. What are the Transition Provisions?

Transition provisions under GST govern the carry-forward of unutilized tax credits, stock, and capital goods from earlier tax regimes to GST. They assist businesses to adjust pending tax liabilities, and transition to the new system without losing credit.

3. What is the Meaning of Transitional Provision?

This provision allows the businesses to utilize their unused credits or liabilities, pertaining to taxes such as VAT and Service Tax, under the previous law and only change them into the new GST system, in order to get rid of, or to be gratuitously dispensed from the tax change.

4. What is the GST Transition Act?

The provisions under Section 140 of the GST Act are called the GST Transition Act. The guidance provides for, inter alia, transferring of existing credits of businesses, adjustment of liabilities and claiming input tax credit from old tax regime to new GST regime.

5.  What is transitional Provisions under GST Section 140 ?

Section 140 provides for carrying forward of CENVAT/VAT credits, and utilization of input tax credit for stock and capital goods existing as on the date GST is launched. It prevents businesses from losing these credits and further operating smoothly under the GST regime.

6. What is the Time Limit for Goods Return Under GST?

The time limit to get goods returned is usually one year from the date of delivery.
You have 90 days to file GST TRAN 1 from the appointed day (GST implementation). Businesses must file GSTR-1, GSTR-3B for every regular GST return by 20th of the subsequent month for monthly filers and 13th for quarterly filers.

Also Read :GSTR-9 Annual Return: A Comprehensive Guide