Input Tax Credit Under the CGST Act on Unsold Stocks: What Traders Need to Know

The purpose of this article is to discuss the accessibility of input tax credit ('ITC') to traders with respect to unsold stock as of the agreed date. The article covers the scenario where credit on the unsold stock was controlled under the current tax regime (e.g., credit of Central Excise or Counteracting Duty ('CVD') to traders). Still, it would be criminal to GST when sold. Part I of the article deals with the state of affairs where a trader is in possession of invoice/prescribed papers evidencing payment of duty.

Section 140(3) of the Central Goods & Service Tax Act, 2017 ('the CGST Act') is a relevant transition facility in this regard. This section permits registered persons under GST to claim credits of eligible duties (which contains Central Excise or CVD) in relation to inputs lying in stock by means of on the appointed date (hereinafter denoted as 'ITC on unsold stock').

To put this into standpoint, let's take an example of a wholesale dealer of chairs who has an unsold stock cost of INR 1,12,500, including the Excise duty component of INR 12,500, as on the appointed day. Since he is not entitled to claim excise duty credit under the existing tax regime (being a trader), the same converts to the cost of the chairs. Since the wholesale dealer will be liable to GST when these chairs are sold under the GST regime, the transition provisions provide for ITC of Excise duty of INR 12,500 paid by him if he falls beneath any of the specified categories.

A. Importer-trader (including the depot of Importer-trader)

‍Suggested Read: Conditional Nature of Credit Notes under Section 34 of CGST Act

The eligibility of Importer-trader can be scrutinized under the following relevant classes:

A person who was not liable to be registered under the 'existing law.' Under Section 2(48) of the CGST Act, 'existing law' has been inter-alia distinct to mean the law relating to levy besides collection of duty or tax on goods or services or both approved before the start of this Act by the Parliament.

On a bare reading of the above description, it is apparent that any law passed by the Legislature for the levy of tax on goods or services, irrespective of its scope, would get sheltered in the meaning of 'existing law.'

Hence, even the Central Sales Tax Act, 1956 ('the CST Act') passed by Congress for the levy of tax on the inter-state sale of goods would get covered underneath the ambit of the phrase 'existing law.'

Thus, on a literal interpretation, an Importer-trader who is liable to be recorded under the CST Act may not get roofed under the category 'person who was not answerable to be registered under the 'existing law''.

However, on a purposive edifice (i.e., mischief rule of interpretation), one can argue that irrespective of the wider description of 'existing law,' it should only mean Central Excise, in addition to Service Tax related laws bordered by the Parliament. Based on this interpretation, it may be possible for the Importer-trader to claim that it is not responsible for being registered under the existing law (which should not contain the CST Act) and, hence, is eligible for ITC on unsold stock.

But, such a position may be disputed by taxing the ruling classes on the basis of a literal interpretation of the term 'existing law' and can lead to denial of the benefit. Therefore, in order to assess the claim of ITC on unsold stock, it is important to examine the coverage of Importer-trader under other prescribed categories instead of solely relying on the current category.

A person who was engaged in the provision of 'exempted services.'

Although prima facie, the above category doesn't seem applicable for a trader, it is appropriate to deliberate the same in view of the definition of 'exempted services' provided under the Cenvat Credit Rules, 2004 ('the Cenvat Rules').

It is relevant to point out that the saying 'exempted services' is not defined under the CGST Act or Integrated Goods and Services Tax Act, 2017 ('the IGST Act'). Thus, one requirement is to resort to the rules of understanding to understand the scope of the term 'exempted services.'

For the relevant understanding rule in such circumstances, various judges have held that in case a word acquires a technical meaning as of its consistent use by the Legislature in a particular sense, it should be tacit in that sense when used in a similar context in subsequent legislation.

Therefore, in the nonattendance of any specific definition under the GST laws, it is harmless to borrow the definition of 'exempted services' from the Cenvat Rules for the purpose of the CGST Act.

Under the Cenvat Rules, 'exempted services' comprise those 'services' on which no Service tax is leviable under Section 66B of the Finance Act, 1994 ('the Finance Act').

Under Section 66B of the Finance Act, Service tax is leviable on all services other than those specified in the 'negative list' of services. The negative list of services, set under 66D of the Finance Act, covers the movement of 'trading of goods ' within its ambit.

In this view of the matter, a person resounding out the activity of 'trading of goods' can be said to be affianced in the provision of 'exempt services'.

Thus, it can be argued that an Importer-trader is a provider of 'exempted services' and, hence, eligible to claim the ITC on unsold stock.

However, this position can also be contested by the tax authorities on the grounds that, on a literal understanding of the provision, a person exclusively engaged in trading activity cannot qualify as a service provider dealing with excused services.

Therefore, in order to further assess the claim of ITC on unsold stock, the importer-dealer may consider obtaining shipper registration under Central Excise laws, as discussed below.

Registered Importer

The term 'registered importer' is not distinct under the CGST law. Since registered importer is a technical term that cannot be understood by applying the code of literal interpretation, even this term needs to be tacit in the context of existing law, i.e., Central Excise laws as well as the Cenvat Rules, by putting on the mischief rule.

Under the existing law, a 'registered importer' is unspoken to be a person who imports goods from outside India. In addition, it is registered under the Central Excise laws to pass the profit of Cenvat credit to buyers.

Thus, to ensure the accessibility of ITC on unsold stock, an importer-trader may deliberate obtaining an 'importer registration' (if not already registered) under the Excise laws besides undertaking requisite compliances.

Once this process is undertaken, an importer-trader should be able to take ITC of complete CVD paid on imported goods procured within 12 months besides lying in stock as on the appointed date.

Domestic traders

The above discussion under A(1) besides A(2) would also hold good for domestic traders (assuming such dealers are registered under CST law) and hold a Cenvatable invoice/ agreed documents.

As the coverage under the groups A(1) and A(2) may be disputed by the tax authorities, such traders may deliberate obtaining registration as First Stage Dealer ('FSD') in order to strengthen the aptness to claim ITC on unsold stock as FSD registration can be gotten by any dealer who purchases goods directly from a shipper or a manufacturer through Excise invoice.

The above mechanism may also be measured for other trade partners in the supply chain who may avail ITC on unsold stock base Cenvatable invoice issued by the importer/ first stage dealer/ second stage dealer in order to guarantee there is no blockage of ITC in the entire supply chain.

Conclusion

The transition necessities under GST with respect to ITC on unsold stock are prone to multiple interpretations. Therefore, traders would try to get themselves covered under the supreme possible specific categories as discussed above so as to fortify their claim of ITC on unsold stock on an actual basis. This will help them to exploit the transition credit on their unsold stock.

Suggested Read: Exploring Section 16(4) of CGST Act - ITC Claims

FAQs

Can I claim GST on stock trading?

Thus, trading in shares and safeties is not considered supply as per the GST Act, and it falls outside the purview of GST. Therefore, refuges traders are not liable for recording under GST.

What are the rules for ITC set off for Cgst?

Introduced by Notification No. 16/2019-Central Tax on March 29, 2019, Rule 88A established a new priority for ITC utilization. Active April 1, 2019, it mandated that IGST ITC be initially used to settle IGST liabilities. Any surplus could then be applied to CGST or SGST/UTGST payments.

Who is eligible and ineligible for input tax credit?

Only registered businesses under GST can claim ITC, while unregistered persons, besides those opting for the configuration scheme, are ineligible. To claim ITC, a registered person must have a valid tax invoice, receive the goods and services, and ensure taxes are paid to the government.

What is the new rule for input tax credit?

The government has made the ISD mechanism mandatory on April 1, 2025. This means that the supply of common ITC must be carried out exclusively over the ISD mechanism.