ANALYSIS OF FINAL TRANSITIONAL RULES VIS A VIS TEXTILE SECTOR

The GST Council has finalized the transitional rules in the meeting held on 03.06.2017 and the final rules are available on the public domain. Representations were made to the government for increasing the percentage of credit admissible in case of non-availability of duty paid documents and it appears that the cries of the assessees have been considered. The final transitional rules provide that where a registered person other than a manufacturer or supplier of services, is not in possession of an invoice or any other document evidencing payment of duty, then the said person will be allowed to avail input tax credit on goods on which duty of excise or CVD under section 3(1) of the Customs Act is leviable in the following manner:-
• If the rate of CGST leviable on the goods is 9% or more, then credit admissible shall be 60% of central tax applicable.
• If the rate of CGST leviable on goods is less than 9%, then credit admissible on such inputs shall be 40% of central tax applicable.
Furthermore, if IGST is applicable on supply, then also credit shall be admissible. In this case, goods on which IGST is leviable at the rate of 18% or above then credit admissible shall be 30%. In other cases the credit admissible shall be 20%.
This credit shall be allowed for 6 months subject to following conditions:-
1. These goods were not unconditionally exempt from the whole of the duty of excise or were not nil rated in the said Schedule.
2. The procurement documents of goods is available with the registered person.
3. The assessee must have provided details of stock in statement FORM GST TRAN 2 at the end of each of the six months giving details of supplies of such goods.
4. The credit allowed shall be credited to the electronic credit ledger of the applicant maintained in FORM GST PMT-2 on the Common Portal.
5. The stock of goods on which the credit is availed is stored so therefore they can be easily identified by the registered person.

The above provision has great implication in the context of textile industry. It is pertinent to note that the benefit of credit shall be admissible only if such goods were not unconditionally exempt from whole of the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not nil rated in the said schedule. This condition is required to be critically analysed. It is also worth noting that the draft transitional rules released on 31.03.2017 stated the similar condition with the difference that the benefit of credit was allowed only if such goods were not wholly exempt from duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 or were not nil rated. On comparing the provisions of the final transitional rules with that proposed in the draft rules, we find that the scope of the condition has been narrowed in the final rules. As per the draft transitional rules, the benefit of deemed credit on stock of goods was available only on the condition that the goods were not wholly exempt from the duty of excise and were not nil rated. However, as per the final transitional rules, the benefit of deemed credit will not be admissible if the goods were unconditionally exempt or were nil rated. It is worth noting that the word exempt is being prefixed with word unconditional thereby meaning that if deemed credit will not be available only if the goods were unconditionally exempt or nil rated. This means that if the goods are exempt but with condition, the benefit of deemed credit will be still available. This interpretation is of immense importance to the textile industry.

Another point that needs deliberation is that the benefit of deemed credit is admissible on goods on which duty of excise or CVD under section 3(1) of the Customs Act is leviable. We submit that it is important to understand that the term used is ‘leviable’ and not ‘paid’. We submit that it is possible that the duty is leviable but the same is not paid due to exemption prevalent in law. Consequently, we may interpret that the benefit of deemed credit is admissible with respect to textile products falling under chapter 50 to 63 because the central excise duty is leviable on such products but is exempted by virtue of exemption notification no. 30/2004-CE dated 09.07.2004. Since, the term ‘leviable’ is of wider scope than ‘payable’, the goods on which central excise duty is leviable irrespective of the fact whether the said duty is paid or not will be eligible for credit availment.

Presently, according to notification no. 30/2004-C.E. dated 09.07.2004, there is complete exemption to specified textile products falling under chapter 50 to 63 on the condition that no cenvat credit of inputs has been taken. Hence, we can say that the exemption to the textile sector is a conditional exemption with the condition that cenvat credit of inputs used has not been taken. Consequently, one may interpret that trader of textile products which has procured goods cleared under notification no. 30/2004-C.E. dated 09.07.2004 may be eligible to avail the benefit of deemed credit as the restriction is only for goods which are unconditionally exempt from the whole of duty of excise. Since the goods cleared under notification no. 30/2004-C.E. dated 09.07.2004 are conditionally exempt, the embargo will not apply to such goods. This interpretation may lead to manufacturers of such products transferring all their stock to their dealers/traders as it is quite probable that such manufacturers do not have valid duty paying document to avail credit under the provision of section 140(3) of the CGST Act, 2017 but they may ensure that at least the benefit of deemed credit is taken by the dealers/traders. In our opinion, such a practise although legally valid may not be accepted by the revenue authorities and the assessees may end up fastening themselves with penal consequences.

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ANALYSIS OF FINAL TRANSITIONAL RULES VIS A VIS TEXTILE SECTOR

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