Transitional Provisions for CENVAT Credits in GST

If you own a manufacturing company or have registered to pay excise duty, then you have probably asked the following question:

“What will happen to my CENVAT credits when I move to GST?”

With the registration window for GST open for all states, and the government actively working towards implementing GST, there are still some details that haven’t been clarified about how CENVAT credits will be handled under the new system. But we do know that they will be converted into a form that’s usable under GST.

Keep reading for a basic overview of CENVAT credits and what will happen to them when a registered business moves to GST

Manufacturing Companies and CENVAT

Prior to 2004, manufacturing companies in India paid taxes when they bought raw materials (also known as capital goods), but failed to receive credit for the tax they had paid. This led to double taxation when the tax department levied excise duty on finished goods. To solve this issue, the government made minor modifications to the VAT regime to create CENVAT.

The Central Value Added Tax (CENVAT) was introduced in 2004 to minimize the burden on manufacturing companies that pay excise duty. Under CENVAT, manufacturers get credit for the tax paid on raw materials, which they can later use to offset the excise duty they owe the tax department.

CENVAT credits

CENVAT credits are the credits provided for the tax paid while purchasing raw materials.

To understand them better, let’s take an example where a company manufactures kitchen knives. The manufacturer buys steel and plastic from their vendor, makes knives, and sells them to the market. According to CENVAT, the knife company should get credit for the tax it paid on the raw materials (steel and plastic).

In order to receive credit, the manufacturer has to submit copies of their purchase invoices to the tax department showing the tax they have paid on their steel and plastic (their capital goods). The tax department grants the manufacturer CENVAT credit equivalent to the tax paid. The manufacturer can later use these credits to offset the excise duty they owe on finished products.

CENVAT credit and GST:

Since GST will replace all current taxes, your current unclaimed CENVAT credits will be converted to GST Input Tax Credit (ITC).

What is Input Tax Credit?

Input Tax Credit in GST is similar to CENVAT credit. Businesses that are registered for GST can claim credit for the tax they paid while purchasing raw materials for their business. They can later use the ITC to offset what they owe in GST.

Transitional provisions for CENVAT credits

According to sections 143 and 144 of the Model GST Law, CENVAT credits accumulated prior to the implementation of GST will be converted to ITC.

If you’re wondering how to move all your current CENVAT credits to ITC, the answer lies in your tax return. Properly filing your tax return for this fiscal year is crucial for moving your CENVAT credits to ITC.

According to the transitional provisions, all of your available CENVAT credits (as shown on your tax return) will be converted to Input Tax Credits as of the day before GST goes into effect. Once GST goes into effect in July 2017, then the number of unclaimed CENVAT credit that you have on March 31st will be converted to ITC.

Since GST and CENVAT do not have identical input credit provisions, there may be some credits earned under CENVAT that are not eligible to be converted to Input Tax Credit. There may also be some credits available under GST that were not available under CENVAT. Only CENVAT credits that are eligible under both CENVAT and GST will be converted to ITC.

There aren’t yet clear guidelines on what opportunities to receive credits will be added or omitted. When you file your tax return, it is safe to include everything you think is eligible to be converted to ITC and leave the decision to the tax department.

If you have unclaimed CENVAT credits which you couldn’t claim because you didn’t have invoices to show the taxes paid, you cannot convert them into ITC.

So far, the GST council has given only a rough overview regarding the transfer of CENVAT credits. They’ve yet to address questions like what kind of additions or omissions they’ve made to the allowed input tax credits, or if there will be a late fee for transferring CENVAT credits after the implementation of GST. Once these areas have been clarified, it will be much easier to make a seamless transition to GST.