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Case of transition credit for capital goods

SEPTEMBER 13, 2017

By L S Karthikeyan, Advocate

1. SECTION 140 of the CGST Act, 2017 provides various situations under which duty paid under the Central Excise Act, 1944 or the Finance Act, 1994 could be taken in the GST Electronic Credit Ledger.

Transition provisions

2. Of the various situations enumerated and included in Section 140, only sub-section (2) directly covers credit on capital goods wherein 'unavailed' CENVAT credit, not carried forward in the ER.1 / ST3 returns is allowed to be taken in the GST ledger. This provision is generally perceived to cover cases where the taxable person had taken 50% of credit in terms of Rule 4(2) of the Cenvat Credit Rules, 2004. There is also a view that even if a person had not taken any credit, 100% of the duty paid on Capital Goods can be considered as 'unavailed'.

3. Apart from the above, in the following situations, credit of duty paid on Capital Goods, can be taken in the GST ledger as part of the balance shown in the returns:

- Credit carried forward in the returns filed for the period ending 30.6.2017 [140(1)];

- Credit carried forward in the return of a registered person engaged in manufacture of taxable and exempted goods / provision of taxable and exempted services [Clause(a) of 140(4)];

- Credit carried forward in the returns of a person having centralized registration (for provision of services) - 140(8).

4. Section 140(7) allows credit of input tax credit on account of services received prior to 1.7.2017 by an Input Service Distributor and Section 140(9) allows re-credit of amount reversed on account of non payment of value / taxes to the provider of input services within a period of three months.

5. The following provisions allow transfer of credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished goods or finished goods only and not on Capital Goods:

- Section 140(3) - To a registered person who was,

• not liable to be registered in the existing law; or

• engaged in manufacture of exempted goods or provision of exempted services; or

• providing works contract service and availing exemption under Notification No.26/2012-ST; or

• A First stage / second stage dealer; or

• A registered importer / depot of a manufacturer.

- Clause (b) of 140(4) to a manufacturer of exempted and dutiable goods / provider of exempted and taxable services;

- Section 140(6) to a registered person who was either paying tax at a fixed rate of paying of fixed amount in lieu of the tax payable;

6. Section 140(5) allows credit of eligible duties in respect of inputs and input services where the duty has been paid under the existing law but received by the registered person after 1.7.2017.

The Case for Capital Goods

7. CENVAT duty paid on Capital Goods could not have been taken by a registered person in the circumstances mentioned in paragraph 5, particularly by persons specified in 140(3) because there was either no output tax liability or that there was a restriction on taking credit in any form.

8. However, in respect of the same output - goods or services, the registered person is liable to pay GST and hence there is an expectation that credit of duty paid on Capital Goods should be allowed to be taken in the GST ledger, as has been allowed in respect of inputs.

9. One plausible reason that could be deduced for not allowing transition credit in respect of Capital Goods is that in respect of Capital Goods, as there was no eligibility / use for CENVAT credit, the taxable person had possibly availed depreciation on the gross value (including duties paid).

10. The above reason may, however, not apply in respect of Capital Goods received after 1.7.2017 and much like the inputs & input services, it would be just if transition credit is allowed for Capital Goods also under Section 140(5).

11. Similarly, in respect of Capital Goods procured by the persons specified in 140(3) and who are liable to pay GST from 1.7.2017, the credit can be allowed at least in respect of the goods received in the FY 2017-18, as capitalization of the same and claim of depreciation would be made only at the end of the year.

Differential treatment under Section 18

12. Clause (d) of Section 18(1) provides that 'where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the day from which such supply becomes taxable'.

13. In the context of Section 18, the above enabling provision would apply when a 'supply' which was exempt from GST becomes taxable supply. Therefore, a registered person who provides a supply which is exempt after 1.7.2017 can take credit of capital goods which was being used for such exempt supply, once the supply becomes taxable.


14. It is felt that the same principle under which credit of GST paid on capital goods used for exempt supply is allowed under Section 18 should be extended to CENVAT duty paid on capital goods which were being used by persons who were not liable to pay output tax under Central Excise Act, 1944 or Finance Act, 1994. The requirement of not claiming dual benefits - credit and depreciation under Income Tax, Act - could be left to the option of the taxpayers.

(The views expressed are strictly personal.)

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