Did you file GST TRAN-1 correctly?

A few days ago, India’s finance minister spoke to the media, announcing that the government collected Goods and Services Tax (GST) of more than Rs 92,000 crore during July, which was well beyond expectations. This was a stupendous achievement for the Indian GST regime, and that too in the very first month of the new taxation system.

In fact, the cheer may not end there, as a good part of indirect tax revenues for the central and state governments (roughly 25 percent) comes from petroleum products, and such products are still outside the ambit of GST. These will provide a healthy financial cushion to these governments if GST revenue should waver a bit.

While everything was set for a good harvest, government noticed that more than Rs 65,000 crore was claimed as Central GST (CGST) transitional credit by businesses across the country. This, of course, can impact the government’s kitty in the coming months, as such credit can be used for payment of taxes. Adding to these claims for transitional credit, refund claims by exporters and state VAT refunds will eat into government’s revenues once pending C forms are collected.

Considering the financial impact of these claims, the CBEC ordered an immediate review of all transitional credits above Rs 1 crore to ensure that if any wrong credits taken, with or without an intent, do not flow into the GST system and deplete revenue.

The first reality check of the GST process may be how the tax officer and the taxpayer will work out misunderstandings in the filing of returns when they come face to face. Understanding the GST council’s intention regarding claims for transitionary credit may help make this interaction smoother.

The previous indirect tax regime of central excise, service tax, VAT, CST, entry taxes, etc. allowed credits of certain taxes subject to conditions in the respective laws. While some laws, such as state VAT laws, generally allowed cash refunds of outstanding balances at the end of the year, central laws allowed taxpayers to carry forward such credits without any refunds. Refunds of credit were allowed only in cases of exports. Thus, there was a need to transfer accumulated credits into the GST system so that the transition would happen in a seamless manner.

The CGST Act made provisions for such transitions (Sections 139-142), and supplemented the provisions with rules outlining detailed procedures (Rules 117-121). Similar provisions were included in the State GST (SGST) laws as well. Three formats — viz. forms TRAN-1, TRAN-2, and TRAN-3 — were made available to taxpayers for claiming credit under different transition situations. Of these, TRAN-1 is the most comprehensive form, designed to cover substantial transition.

Being one of the most comprehensive TRAN forms, it is the basis for transitioning tax credits to the GST regime. Any credit missed is a cash loss to the business. Where there is a delay in filing TRAN-1, there will also be an impact on working capital. During the time TRAN-1 is not filed, credits from the earlier tax system will not flow into the GST system, and thus only current GST credits will be available for use.

As explained earlier, TRAN-1 is also important for the government, as any wrongly claimed credit will directly impact government’s net revenue collection. Moreover, the previous tax system (especially on the central government side) did not have a facility of electronic cross matching of credits, so credits were claimed on the basis of hard copy invoices. To ensure proper accounting, it became necessary for the central government to verify tax credits as they flowed into the GST system and before they completely intermingled with GST credits.

The TRAN-1 form therefore has equal importance both to the taxpayer as well as the government. It is hard cash for both, and therefore should bear hard scrutiny.

On 9 September, the GST council recommended extending the timeline for filing TRAN-1 from before 28 September to 31 October. Council also recommended a one-time revision of the TRAN-1 form.

However, the intention of the council doesn’t seem to have translated into law, as only the time limit for revision of the already filed TRAN-1 is extended to 31 October. Accordingly, it appears that the original TRAN-1 is still required to be filed by 28 September 2017, and then can subsequently be revised once by 31 October 2017 (Order No 2/2017 dated 18 September 2017 read with Rule 120A introduced under Notification No. 34/2017- Central Tax dated 15 September 2017).

• Give utmost importance to form TRAN-1, as it is as good as a currency note or cash. All eligible credits should be claimed and all ineligible credits should be avoided.

• Scrutinize eligibility under the old law as well as the new law. If credit was not admissible under the old law but is available under the GST law (e.g. tax paid on rent-a-cab services for employee transport where law mandates such transport), it cannot be carried forward. Similarly, if credit was admissible under the old law but is not available under the current law, then it too cannot be carried forward.

• Remember that there are often disputes between the taxpayer and the government on eligibility of credit. Whether such credit can be carried forward might become a point of contention. For instance, there could be a situation where the first adjudicating authority gives an order against the taxpayer, and the taxpayer files an appeal. Or, there could be a converse situation where the first order is in favor of the taxpayer, but the government files an appeal. There could also be many such situations based on the unique facts of each case, and the stance of appeal decisions have to be taken when deciding whether to carry forward the credit or not.

• Decide in advance whether pending credit should be claimed as refund (as in the case of VAT balances or in the case of exporters under the Central Excise and Service Tax Law), or should be carried forward to GST without claiming the refund.

• Ensure that all registrations have been migrated properly. TRAN-1 does not accept credits pertaining to old registrations that were not migrated properly. We have seen cases where there was more than one registration in a state under the old law (e.g., two factories in a state having two central excise registrations) that were not migrated properly. Such technical snags will take time. Therefore it is important not to leave TRAN-1 filing for the last minute.

• Prepare for contentious issues that have no clear answers in the law. For example, recording in TRAN-1 of ISD invoices received after 1 July that could not have been distributed to different locations under the old law. Similar to this are cases where taxpayers who were working under the excise exemption, which allowed concessional duty at 2 percent if no CENVAT credit was taken. In GST, these taxpayers will have to discharge the full rate of tax duty without any clear enabling transition provisions to claim credit. In all such cases (and there are many), try to work out a solution in consultation with your advisor or the jurisdictional officer. Government has yet to specify the jurisdiction, but one can still reach out to the old jurisdictional officers under central or state government for guidance. If you cannot reach an agreement, matters can be referred to the CBEC or the commissioner of sales tax in the state.

• Note that there are certain transactions on which credit is not allowed. These include, for example, capital goods in transit on 30 June, where the invoice was issued prior to 1 July, but capital goods were received post 1 July. Such transactions should be carefully marked and credit should not be taken. Wrong credits in TRAN-1 can invite recovery and penal proceedings under Sections 73/74 of the CGST Act.

It is very important to both the cash flow of individual businesses as well as the government’s net revenue collection that TRAN-1 forms are filed or revised carefully, and we hope the suggestions above will help. Each company and each sector will have peculiar issues that will need to be analyzed separately. Those who have filed TRAN-1 already should carefully review it and revise if necessary. Those who have not filed it so far should quickly start the process before it is too late.

Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application, Avalara India GST, can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.