Exempt Supply becoming Taxable Supply under GST : ICAI Suggestions

By | October 9, 2017
(Last Updated On: October 9, 2017)

Suggestions on GST Implementation Issues 28.09.2017 by ICAI Indirect Tax Committee

Law Related Issues

39. Exempt Supply becoming Taxable Supply

Section 18(1) of CGST Act provides that a person who has applied for registration under
this Act within 30 days from the date on which he becomes liable to registration and has
been granted such registration shall be entitled to take credit of input tax in respect of
inputs held in stock and inputs contained in semi-finished or finished goods held in stock
on the day immediately preceding the date from which he becomes liable to pay tax under
the provisions of this Act;

Section 18(1)(d) of CGST Act provides that where an exempt supply of goods or services
or both by a registered person becomes a taxable supply, such person shall be entitled to

take credit of input tax in respect of inputs held in stock and inputs contained in semi-
finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date
from which such supply becomes taxable:

Provided that the credit on capital goods shall be reduced by such percentage points as may
be prescribed.

Issue
• Though the credit of input tax in respect of inputs held in stock and inputs contained in
semi-finished or finished goods held in stock on the day immediately preceding the
date from which he becomes liable to pay tax under the provisions of this Act is
allowed, no clarification is provided as to credit of Capital Goods lying on the day
immediately preceding the date from which he becomes liable to pay tax under the
provisions of this Act.

• Law only allows the Input Tax Credit for registered persons applying for registration
within thirty days from the date on which he becomes liable for registration and does
not provides for registered person applying for registration beyond the period of thirty
days. The law is trying to penalize the registered person on wrong front. It is agreed
that the registered person has not taken registration within the prescribed time limit. He
should be penalized for that with stringent penalty provisions.

• Bona fide view entertained about non-eligibility to tax cannot become such a burden
that industry will be forced to look for ways to escape from such consequences.

Suggestion
• It is suggested that suitable credit be allowed after deducting appropriate depreciation
as the person earlier has some exemption but under come the taxable chain. Article 14
of the Constitution of India provides right of equality and if credit to such person is not
allowed then it will lead to non-equality among the equal.

• It is suggested that as a principle of Natural Justice, dealers obtaining delayed
registrations be allowed to set off the tax paid on the material on which output liability
is being created as Output Tax would be collected from the dealer from the date when
he became liable for registration.

• Following explanations be added to Section 18(1)(d)
“Explanation 1 – exempt supply becomes a taxable supply includes when a bone fide
view is overturned by law or decision of a Court or Tribunal and such bona fides
declared in the law so laid down.
Explanation 2 –notwithstanding anything to the contrary in this Act, entitlement to take
credit on input tax shall refer to input tax related to input, input service and capital
goods, computed as aforesaid, used in relation to such supply.

 

Read Suggestions on GST Implementation Issues 28.09.2017 by ICAI Indirect Tax Committee

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