Publish: January 20, 2026
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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