GST Transition of ITC on goods taxable at first stage under VAT

The most important and the very first step towards GST is the transition provisions under GST law. The transition provisions with regard to input tax credit are very important. In this article I concentrate on how the credit of taxes paid on the goods taxable at first stage especially under Punjab VAT Act, 2005, would be available under the GST regime.


Background: VAT although a multi stage tax system, but certain items under Punjab VAT Act, 2005 were taxable only at their first point of sales and sales of such goods at subsequent stages is tax free and no input tax credit of tax paid at the first stage is admissible to the persons selling such goods at subsequent stages.

Transition of ITC of tax paid on stock of goods taxable at first stage: The question therefore with regard to such goods is that with the transition to GST regime, when all the stages would be taxable, whether the persons selling such goods at subsequent stages as tax free, would get any benefit of taxes paid on the stock of goods held by them on the appointed day(i.e. day on which GST becomes applicable)?

The answer to the above question has been provided under Rule 3 of the Draft Transition rules introduced recently.

The said Rule runs as under:

(3) (a) (i) A registered person, holding stock of goods which have suffered tax at the first point of their sale in the State and the subsequent sales of which are not subject to tax in the State availing credit in accordance with the proviso to sub-section (3) of section 140 shall be allowed to avail input tax credit on goods held in stock on the appointed day in respect of which he is not in possession of any document evidencing payment of value added tax. 

(ii) Such credit shall be allowed at the rate of [forty per cent.] of the State tax applicable on supply of such goods after the appointed date and shall be credited after the State tax payable on such supply has been paid. 

(iii) The scheme shall be available for six tax periods from the appointed date.

 (b) Such credit of State tax shall be availed subject to satisfying the following conditions, namely,- 

(i) Such goods were not wholly exempt from tax under the Value Added Tax Act,….. 


(ii) Document for procurement of such goods is available with the registered person. 


(iii) Registered person availing this scheme and having furnished the details of stock held by him in accordance with the provisions of clause (b) of sub-rule (2) of rule 1, submits a statement in FORM GST TRAN--- at the end of each of the six tax periods during which the scheme is in operation indicating therein the details of supplies of such goods effected during the tax period.


 (iv) The amount of credit allowed shall be credited to the electronic credit ledger of the applicant maintained in FORM GST PMT-2 on the Common Portal. 

(v) The stock of goods on which the credit is availed is so stored that it can be easily identified by the registered person. 

Analysis: The above Rule clarifies that if the person holding stock of goods which were taxable at first stage of sales, then he will be allowed input tax credit at the rate of 40% of the SGST applicable on such goods, if the said person is not in possession of document evidencing the payment of VAT.  However, if a person is in possession of invoice evidencing payment of VAT on such goods, then it seems that he shall be allowed full credit of VAT paid at first stage.

Another important thing is that the input tax credit of such tax would be available only after the SGST has been paid on the supply of such goods, that means if appointed day for GST is 1st July then you would not get credit of VAT paid on stock immidiately in the month of July, it shall be available in the moth of August i.e. after the payment of SGST for the month of July and that too only for that much of the stock which is supplied during the month of July.

Other conditions for availment is that you must be in possession of invoice showing procuement of goods and you will have to file a statement for six tax periods during which the scheme is in operation indicating the details of supplies of such goods effected during the said periods.Another interested condition is that credit would be available only if the goods are stored in such a way that these are easily identifiable.

Overall in my personal view although the incorporation of provisions with regard to fisrt stage goods in the transition rules seem to settle the law in this regard but at the same time the conditions imposed for availment of credit especially the condition with regard to identification of stock, might give rise to litigation. 

Posted by AMIT BAJAJ ADVOCATE at 10:13 PM

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