GST Exempt Supply becoming Taxable Supply : Issues and Suggestions

Suggestions on GST Acts (July 2017) by Institute of Chartered Accountants of India

23. 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 dealers applying for registration within thirty days from the date on which he becomes liable for registration and does not provides for dealer applying for registration beyond the period of thirty days. The law is trying to penalize the dealer on wrong front. It is agreed that the dealer 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 ICAI Suggestions on GST Act to Govt : July 2017

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