GST credit restriction of 40 per cent not applicable to stocks at branches/showrooms of manufacturers

By R.S.Sharma Advocate & GST Expert

Rule (3) (a) of GST Transitional Provisions has prescribed credit at the rate of 40 per cent of CGST applicable  on stocks in hand on date of  transition to GST. But said provision is not at all applicable to stocks lying in showrooms and branches of the manufacturers who are still entitled to 100 per cent credit of excise paid on goods in stock even if the excise paid bill is not in the names of show-rooms and branches.

Rule (3) (a) of GST Transitional Provisions provides that

“( i) A registered person, who was not registered under the existing law, availing credit in accordance with the proviso to sub-section (3) of section 140 shall be allowed to avail input tax credit on goods held in stock on the appointed day in respect of which he is not in possession of any document evidencing payment of central excise duty.

(ii) Such credit shall be allowed at the rate of [forty per cent.] of the central tax applicable on supply of such goods after the appointed date and shall be credited after the central tax payable on such supply has been paid.

(iii) The scheme shall be available for six tax periods from the appointed date.

(b) Such credit of central tax shall be availed subject to satisfying the following conditions, namely,-

(i) 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.

(ii) Document for procurement of such goods is available with the registered person.

(iii) Registered person availing this scheme and having furnished the details of stock held by him in accordance with the provisions of clause (b) of sub-rule (2) of rule 1, submits a statement in FORM GST TRAN— at the end of each of the six tax periods during which the scheme is in operation indicating therein the details of supplies of such goods effected during the tax period.

(iv) The amount of credit allowed shall be credited to the electronic credit ledger of the applicant maintained in FORM GST PMT-2 on the Common Portal.

(v) The stock of goods on which the credit is availed is so stored that it can be easily identified by the registered person.

Foregoing Transitional Provision prescribes a procedure for entitlement of deemed credit of 40 per cent of GST payable by persons who are not in possession of any invoice or documents evidencing payment of duty and who intend to avail the credit under Proviso to  sub-section (3) of section 140  of CGST Bill 2017. The said Proviso is cited below:

“Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.”

The language of Proviso is crystal clear that Proviso to sub-section (3) of Section 140 applies only to non-manufacturers. Hence the deemed credit rate of 40 per cent of CGST payable will apply only to those Dealers/Retailers who are non-manufacturers and are not having duty paid documents.

The stock lying in show-rooms and branches of the manufacturers is still entitled to 100 per cent credit of excise paid which can be used for payment of CGST  on date of transition as the situation is not covered by the Proviso but the provisions of sub-section (3) of Section 140 of CGST Bill 2017. There is no such restriction for manufacturers and there is no such requirement that excise paid bill should be in name of show room or branches. The only requirement is that the excise paid bill should be available. No goods can be taxed twice and the intention of legislature is not to deny credit of duty paid stocks lying in show rooms/branches/depots of the manufacturers. When it comes to interpretation of law; one needs to burn midnight oil before jumping on the conclusion. The provision needs to be read at least a dozen time before forming an opinion on issue which has already become hottest issue for all the stakeholders.

(Writer is a Lawyer based in Gurgaon. He is advising several MNCs, Indian Corporates & PSUs on GST Transition Issues. He can be mailed at )


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