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How were VAT credits transitioned into GST?

VAT Credit into GST

  • When GST was implemented on 1st July 2017, it replaced VAT, Service Tax, and other indirect taxes
  • Businesses registered under VAT needed a way to carry forward unused input VAT credit into the GST regime
  • The transition ensured that legitimate tax credits were preserved, avoiding tax cascading
  • Only eligible and documented VAT credits could be carried forward under specific conditions
  • This transitional credit mechanism was facilitated through GST Form TRAN-1 and TRAN-2

Use of GST TRAN-1 Form

  • Registered persons had to file Form TRAN-1 to claim credit for closing VAT balances
  • The form included details of VAT, Entry Tax, and other state taxes paid on inputs held in stock
  • TRAN-1 had to be filed by registered persons who were previously VAT dealers, even under composition schemes
  • The deadline for filing TRAN-1 was initially 90 days from the GST rollout, with several extensions granted
  • The form was filed online on the GST portal, and accurate opening balances were crucial

Eligibility Conditions for VAT Credit Carry Forward

  • Credit was allowed only if it was admissible under both VAT and GST laws
  • The credit must have been recorded in VAT returns filed for June 2017 or earlier
  • Proper invoices or documents showing tax paid must have been available
  • The business must have been registered under GST as a regular dealer (not under composition)
  • Closing stock as on 30th June 2017 needed to be supported by documentary proof of tax paid

Use of GST TRAN-2 Form (For Dealers without Invoices)

  • Dealers who had stock on which tax was paid but no tax invoice was available could file TRAN-2
  • Credit was allowed based on deemed tax paid, typically at 40% or 60% of the GST rate, depending on stock
  • TRAN-2 was filed monthly for six months from July 2017 to claim credit as sales occurred
  • This helped retailers, traders, and small dealers who lacked formal documentation but held tax-paid stock
  • The scheme aimed to ease the transition for non-manufacturer traders

Verification, Audit, and Legal Issues

  • Many businesses faced scrutiny, audit, or delay in transitional credit approval
  • Mismatch in stock records, missing invoices, or incorrect VAT returns led to credit denial or revision
  • Supreme Court and High Courts later allowed reopening of TRAN-1 filing for aggrieved businesses
  • Tax authorities issued clarifications and circulars on admissibility and documentary proof required
  • Accurate reconciliation between VAT closing returns and GST opening balances was key to avoiding disputes

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