Indirect Tax Alert

Circulars issued by the Central Board of Indirect Tax & Customs (CBIC):

I. Clarification on the amended Rule 89(5) of the Central Goods & Services Tax Rules, 2017 (CGST Rules) (Circular no. 181/13/2022-GST dated 10 November 2022)

1. The Honorable Supreme Court in Union of India Vs. VKC Footsteps India Pvt. Ltd. [2021 (9) TMI 626 – Supreme Court] had observed the anomalies in the formula for a refund of unutilised Input Tax Credit (ITC) on inverted duty structure (under Rule 89(5) of the CGST Rules) and had urged the GST Council to reconsider the formula and take a policy decision.

2. Consequently, in line with the recommendations made in the 47^th GST Council meeting, Rule 89(5) of the CGST Rules was amended vide notification no. 14/2022 - Central Tax dated 05 July 2022. Further, vide notification no. 09/2022 – Central Tax (Rate) dated 13 July 2022, the refund of unutilised ITC on account of inverted duty structure was restricted in case of the supply of certain goods falling under Chapters 15 and 27, effective 18 July 2022. However, certain doubts were raised about whether the aforesaid amendments would apply prospectively or retrospectively. In this regard, CBIC has provided the following clarifications:

a. Issue: Whether the amended formula as per notification dated 05 July 2022 would apply to the refund applications filed on or after 05 July 2022 or whether the same would also apply to refund applications filed prior to 05 July 2022 and which are pending with the proper officer as on 05 July 2022?

Clarification: It has been clarified that the amendment to Rule 89(5) of the CGST Rules is not clarificatory in nature and the same would apply prospectively for refund applications filed on or after 05 July 2022. The refund applications filed prior to 05 July 2022 will be processed as per the formula prevailing prior to the amendment.

b. Issue: Whether the restriction provided in the notification dated 13 July 2022 (made effective from 18 July 2022) would apply to the refund applications pending as on 18 July 2022 or whether the same would apply to refund applications filed on or after 18 July 2022 or whether the same would only apply to refunds pertaining to the prospective tax periods?

Clarification: It has been clarified that the restriction to claim a refund on account of inverted duty structure on certain goods falling under Chapters 15 and 27 would apply prospectively in respect of all refund applications filed on or after 18 July 2022 and would not apply to refund applications filed prior to 18 July 2022.

BDO Comments

The clarification on the applicability of the revised formula for computing of ITC in case of inverted tax structure only for the claims filed on or before the date of amendment warrants a relook since the amendment was made to address an anomaly in the formula, which, ideally should have been given a retrospective effect. Similarly, in the case of restriction on claiming a refund on specified items of Chapters 15 and 27, the effective date of restriction on claiming a refund on the basis of the date of filing a refund claim does not seem to be a correct approach since, at the time of availing these credits (resulting in origination of the refund claim), there was no restriction in claiming the refund and such cut-off date for eligibility of claiming refund accrued for past transactions on the basis of date of filing refund claim. The industry may consider making representation to the GST Council to suitably revise the clarifications.

II. Guidelines for verification of transitional credit (Circular no. 182/14/2022-GST dated 10 November 2022)

1. In light of the decisions of the Honorable Supreme Court in Union of India Vs. Filco Trade Centre Pvt. Ltd. and Ors. [2022-VIL-38-SC] dated 22 July 2022 and the subsequent order in Miscellaneous Application [2022-VIL-63-SC] dated 02 September 2022, it has been directed that the common portal shall be opened for filing the transition forms (Form GST TRAN-1 and Form GST TRAN-2) from 01 October 2022 to 30 November 2022. Further, the Honorable Supreme Court has also directed that the verification of the claims made during the aforesaid period has to be conducted within 90 days after completion of the aforesaid period i.e., within 90 days from 01 December 2022, i.e., up to 28 February 2023.

2. It has been clarified that the Honorable Supreme Court has allowed for filing/revising the transition forms and has not allowed for the revision of returns filed under the pre-GST regime (i.e., under Excise, Service tax, VAT, etc.).

3. In line with Para 4.5 of Circular no. 180/12/2022-GST dated 09 September 2022, it has been stipulated that a self-certified copy of the transition forms shall be made available to the jurisdictional tax officer.

4. The Circular clarifies that verification of the claim would be done by the jurisdictional officer. However, where the transitional form involves claims pertaining to taxes administered by other than a jurisdictional officer, the verification for credit of such taxes would be carried out by the authority administering such taxes (counterpart tax officer), e.g. a claim of transition of State/Union Territory taxes by a taxpayer administered by Central Tax authorities, the verification of such claim should be carried out by the State Tax authorities. The counterpart tax officer shall send its report within the prescribed period.

5.The Circular also lays out the various administrative procedures that must be followed by the jurisdiction tax officer and counterpart tax officer for verification of transition credits, adherence to the principles of natural justice, passing a reasoned order, time limit for passing such order (in line with the directions of the Honorable Supreme Court), modalities for co-ordination between the Centre and the State tax authorities, etc.

6. Further, the Circular also provides the following guidance for verification (including checks for verification on a suggested basis) of the claim of transition credits:

Sl. No.	TRAN-1 reference	Indicative list of the nature of credits	Key checks as per the Circular
1.	Col. 6 – Table 5(a)	This table captures details of CENVAT Credit carried forward in the Excise/Service tax returns for the period ending 30 June 2017	It must be verified that credit has been taken against the closing balance of Excise/Service tax returns, excluding ineligible taxes like Education cess, secondary education cess, Krishi Kalyan Cess, Swachh Bharat Cess, clean energy cess, etc. Returns were filed for the last 6 months in the pre-GST regime.
2.	Col. 11 – Table 6(a)	This table captures details of un-availed CENVAT Credit on capital goods in the pre-GST regime.	It should be examined that only credit for capital goods not availed in any return is considered in this table. Where credit on capital goods was not availed earlier, the entire amount cannot be claimed in Form GST TRAN-1.
3.	Col. 6 in Entry 7A – Table 7(a)	This table seeks to allow CENVAT Credit in respect of inputs held in stock, inputs contained in semi-finished goods and finished goods held in stock as on 1 July 2017 based on invoice/duty paying document	It must be verified that the taxpayer has adhered to the provisions of Rule 6 of CENVAT Credit Rules, 2004. Where only exempted goods/services were manufactured or provided, only credit of inputs and inputs contained in semi-finished goods lying in stock as on 30 July 2017 would be available Where exempted as well as non-exempted goods or services were manufactured or provided, credit can be availed only on inputs held in stock that were not attributed to exempted and non-exempted goods till 30 June 2017 in this table. Where a new taxpayer has availed credit using a Credit Transfer Document, the same can be verified. Where stocks declared by the taxpayer are high, the same can be checked from the VAT returns.
4.	Col. 6 in Entry 7B – Table 7(a)	This table pertains to deemed credit on inputs that are claimed by new taxpayers (such as traders, who were neither registered as manufacturers or service providers in the pre-GST regime) at the rate of 60%/40% of Central Tax payable on the supplies	Where stocks declared by the taxpayer are high, the same can be checked from the VAT returns. This will be claimed in TRAN-2. Also, it must be verified that this credit is not availed in any other part of TRAN-1.
5.	Col. 8 – Table 7(b)	This table captures transition credit taken on input and input services (but not capital goods) received after 1 July 2017 but taxes in respect of the same was paid under the pre-GST regime	It must be ascertained that the taxpayer is in possession of the duty-paying documents. The conditions for availing of ISD credit must be satisfied.
6.	Col. 9 – Table 8	This table pertains to a centrally registered unit, the CENVAT Credit carried forward can be distributed in full or part to its multiple GST registrations	It must be ensured that the recipient unit does not take TRAN-1 credit, independent of the credit distributed by the centrally registered unit as this would lead to double credit to such a unit.
7.	Col. 7 – Table 11	The transition of credit in respect of supplies attracting both VAT and Service tax, and where VAT and Service tax, both were paid prior to 01 July 2017 but the supply is made after 01 July 2017	It should be verified that the Service tax claimed as credit was actually paid under the Service tax law and for supplies made after 1 July 2017 credit of VAT paid cannot be taken as CGST and vice versa.

7. In addition to the above, as a general check, the jurisdiction tax officer must also ensure that the credit which is being claimed through TRAN-1/TRAN-2 is not taken through a return in Form GSTR-3B as this would lead to double credit being taken by the taxpayer.

8. The Circular also provides that Circular no. 33/07/2018-GST dated 23 February 2018 regarding disputed and blocked credit may be followed during the verification process of transition credits.

BDO Comments

While the aforesaid Circular is for the administrative convenience of the tax authorities and provides the directions for verification of transition credits, the same can be usefully considered by the taxpayers for preparing and furnishing requisite documentation/records for verification of the transition credit claimed in this round. Further, the Circular would also bring in consistency in the verification of transition credit claims by various jurisdictional officers which is a welcome move.

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