GST input tax credit on closing stock from UPVAT is denied if the goods were not sold under UPVAT before GST introduction.

GST input tax credit on closing stock from UPVAT is denied if the goods were not sold under UPVAT before GST introduction.

Issue:

Whether an assessee, a registered dealer under the UP VAT Act, is entitled to claim Input Tax Credit (ITC) under Section 140 of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) and Uttar Pradesh Goods and Services Tax Act, 2017 (UPGST Act, 2017), on its closing stock of goods held on the date of GST introduction (July 1, 2017), if the tax paid on purchase under the UPVAT Act was only eligible for ITC upon a subsequent taxable resale under the UPVAT Act.

Facts:

• The assessee was a registered dealer under the UP VAT Act and dealt in food grains, rice, etc.
• On the date of introduction of GST (July 1, 2017), the assessee held closing stock of goods on which tax had been paid at the time of purchase under the UPVAT regime.
• The assessee initially filed Form GST TRAN-1 to claim ITC on this closing stock.
• Subsequently, the assessee realized it could not claim the ITC as available and therefore filed Form GST TRAN-2, reversing the claimed ITC.
• Under the UPVAT Act, as per Section 13, input tax credit could only be availed once purchased goods were re-sold as a taxable sale. It was not available merely upon purchase.
• The goods in the closing stock were admittedly not sold by the assessee on the date of GST introduction.
• The closing stock of the assessee was not exempted under the GST Act.

Decision:

The court held in favor of the revenue. It ruled that under the UPVAT Act, ITC could only be availed once purchased goods were re-sold as a taxable sale, and not otherwise. Since the assessee admittedly had not sold the goods in its closing stock on the date of GST introduction (July 1, 2017), the input tax credit available with it could not be considered as input tax credit on the purchase of said goods, as they were admittedly not sold. Therefore, the assessee was not entitled to input tax credit on the closing stock under Section 140 of the CGST/UPGST Act.

Key Takeaways:

• Transitional ITC (Section 140): Section 140 of the GST Act allows taxpayers to transition eligible ITC from the pre-GST regime (like VAT) to the GST regime. However, this transition is subject to specific conditions.
• Pre-GST Law Eligibility: The eligibility of ITC under the transitional provisions (Section 140) is fundamentally tied to whether such credit was permissible and available under the erstwhile law (e.g., UPVAT Act) and could be carried forward.
• UPVAT Act – ITC on Resale: The crucial point here is the specific provision of Section 13 of the UPVAT Act, which linked the availability of ITC on purchases to their subsequent taxable resale. Simply paying tax on purchase was not enough; the credit was effectively contingent upon a future taxable event (sale).
• No Sale, No ITC under UPVAT, No Transition to GST: Since the goods in the closing stock were not sold before July 1, 2017, the condition for availing ITC under the UPVAT Act (i.e., taxable resale) was not met. Therefore, no “eligible” ITC truly existed under the UPVAT Act that could be transitioned into the GST regime via Section 140.
• Purpose of Transitional Provisions: Transitional provisions are meant to allow credit for taxes already paid and eligible under the old law, not to grant new credits that were contingent and unavailed under the old law’s conditions.
• “In Favour of Revenue”: The ruling emphasizes that the benefit of transitional ITC is not automatic on all closing stock but depends on the specific ITC eligibility rules of the previous tax regime.