NOVEMBER 15, 2017

By Ashish Kr Bansal, CA

THE GST Council in its 23rd meeting held in Guwahati shifted several items from 28% tax bracket to 18% tax bracket. The council also fully exempted certain items which were earlier taxable. While this is certainly good news for consumers to cheer about, the registered tax payers have many imminent questions viz. what would happen on the ITC involved in the stock in hand on the effective date of reduction.

This article aims to examine the above.

Items earlier taxable now fully exempted

Section 18(4) of the CGST Act and corresponding SGST Act provides that where goods and service supplied by a taxable person becomes wholly exempt he shall pay debit from electronic credit ledger or electronic cash ledger of an amount equivalent to the credit of -

1) input tax in respect of inputs held in stock, inputs contained in semi finished goods or finished goods;

2) input tax in respect of capital goods for its remaining useful life where total life is deemed to be 5years (60months), Rule 44 of CGST Rules 2017.In case capital goods was used for providing two taxable supplies out of which one subsequently becomes wholly exempt, then pro rata credit can be claimed as credit in terms of proviso to Rule 43(d).

Proviso to Section 18(4) further provides that any balance of input tax credit lying in electronic credit ledger shall lapse after payment of amount calculated above. However, in our opinion, this provision will get attracted only when all goods and services supplied becomes wholly exempted. Since supplier will have to reverse the ITC which he has already paid to his supplier, he would have to make a corresponding increase in the price to mitigate the loss.

Reduction Tax rate but not full exemption

As discussed, section 18(4) will get attracted only when taxable supplies become wholly exempt. In case tax rate is reduced from a higher slab to lower slab but not NIL there is no requirement to reverse the input tax credit on stock in hand immediately before such reduction.

However, there is another problem that taxpayers especially traders operating on thin margins will have to face and that is accumulation of input tax credit due to reduction in rate. For example, on 14th Nov 2017 a trading firm M/s XYZ & co has stock of Rs 1Cr of shampoo which has been shifted from 28% to 18% w.e.f from 18%. Assuming M/s XYZ& co has no other transactions, the input tax credit balance of the firm would be Rs 28 lacs on 14th Nov 2017. Assuming a 5% margin (FMCG wholesaler) even if the entire stock is sold after 15th Nov 2017 the output tax liability of the firm would be Rs 18.90 lacs (18% of 1.05Cr) leading to unutilised ITC of Rs 9.1 Lacs. To utilise this ITC fully, M/s XYZ & co would have to make further sale of Rs 10.62 crores i.e a total sale of 11.67 times more than the stock on the date of reduction .

It must also be kept in mind due to anti profitability clause, any reduction in rate of tax has to be passed on the consumer by way of commensurate reduction in prices ( Sec 171 of the CGST Act ).

Whether Refund of accumulated input tax credit would be available ?

The next logical question that arises is whether, in case Input Tax credit is not utilised fully (or the time and turnover required to utilise it fully is not feasible)whether refund of the same would be available or not?.

The proviso to sub-section 3 of Section 54 of The CGST Act and relevant SGST Act provides that -

Provided that no refund of unutilised input tax credit shall be allowed in cases other than—

(i) zero-rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council

Hence Refund of unutilised input tax credit would not be available -

a) where output tax supplies is NIL or fully exempt .

b) on supplies as notified by government where refund has been specifically blocked for instance in case of woven fabrics of cotton , silk ,wool or manmade fibre (Notification no 05/2017 Central Tax Rate dt 28.06.2017)

In all other cases, Refund can be claimed by taxable person where tax on inputs is more that than tax on output supplies, subject to fulfilment of other conditions of Section 54.

Time limit for making refund application

An application for refund of unutilised input tax credit be made within 2 years from the end of financial year in which such claim of refund arises.

Conclusion:

Effect of reduction in rates on Input tax credit and availability of refund can be summed up as below -

GST being a value added tax, a supplier loses benefit of ITC in case of full exemption, whereas in case of reduction in rates (other than full exemptions) he has to bear accumulation of unutilised Input tax credit and resulting working capital blockages (specially for traders operating on thin margins). It seems that a supplier is on the losing side in the short term, however, reduction in tax rates would also result in increased sales which may compensate the above losses in the long run.