Chapter-2

Transitional Credit Under GST

 Chapter 2: Transitional Credit Under GST

State Taxes and Excise Department

2.1 Introduction
Goods and Services Tax is a significant reform in the field of indirect taxes in our
country, which replaced multiple taxes levied and collected by the Centre and States.
GST is a destination-based tax on supply of goods or services or both, which is levied
at multi-stages wherein the taxes will move along with supply. To ensure the seamless
flow of input tax from the existing laws to GST regime, a ‘Transitional arrangements
for input tax’ was included in the GST Acts to provide for the entitlement and manner
of claiming input tax in respect of appropriate taxes or duties paid under existing laws.
Transitional credit provisions are important for both the Government and business. For
business, the transitional credit provisions ensure transition of accumulated credits from
the legacy returns, input tax in respect of raw materials, work in progress, finished
goods held in stock as on the appointed day as well as credit in respect of capital goods
into the GST regime. The provisions enable taxpayers to transfer such input credits only
when they are used in the ordinary course of business or furtherance of business.
Section 140 of the CGST Act 2017 (and SGST Acts/ UTGST Acts) enables the
taxpayers to carry forward the Input Tax Credit (ITC) earned under the existing laws to
the GST regime. The section, read with Rule 117 of CGST Rules 2017, prescribes
elaborate procedures in this regard. All registered taxpayers, except those who are
opting for payment of tax under composition scheme (under section 10 of the Act), are
eligible to claim transitional credit by filing TRAN 1 returns within 90 days from the
appointed day. The time limit for filing TRAN 1 returns was extended initially till
27.12.2017. The due date for filing TRAN 1 was further extended to 31.03.2020, vide
CBIC order No.01.2020-GST dated 07.02.2020, for those taxpayers who could not file
TRAN 1 due to technical difficulties and those cases recommended by the GST
Council.
2.2 Audit objectives
The audit of transitional arrangements for input tax credit under GST was taken up with
the following audit objectives:
i. Whether the mechanism envisaged by the Department for selection and
verification of transitional credit claims was adequate and effective.
ii. Whether the transitional credits carried over by the assesses into the GST regime
were valid and admissible.

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2.3 Audit Criteria

The criteria against which the audit objectives and sub-objectives are to be verified are
as under:-
i. The provisions of Section 140 of the CGST Act 2017 and SGST Act 2017 read
with Rules 117 of the CGST Rules 2017 and SGST Rules 2017,
ii. Notifications/Circulars issued by CBIC, Himachal Pradesh State Government Tax
Department and relevant instructions issued by the CBIC field formations.
2.4 Audit Scope and Methodology
The audit of Transitional credit claim involved scrutiny of returns, TRAN 1 and TRAN
2, filed by the taxpayers under the transitional arrangements for input tax provided for
under Section 140 of the GST Act. Audit verification involves the scrutiny of process
and outcomes of departmental verifications along with detailed independent
verification of selected claims in 13 Revenue districts in the State.
2.5 Sample Selection
A sample of 592 cases (73 per cent of the cases i.e., 431 were from ITC category 5C)
covering high-risk cases pertaining to major industrial hubs/economic centres of the
State were selected for audit. The Revenue district wise detail of sample selection is as
under:
Bilaspur 20, Chamba nine, Hamirpur 50, Kangra 78, Una 47, Shimla 76, Sirmour 53,
Baddi 128, Kullu 22, Mandi 42, Solan 67.
2.6 Results of Audit
A sample of 592 cases were test checked across 11 divisions of Himachal Pradesh State
Commissionerate during 2020-21. Test checks of these cases revealed various
irregularities under following categories as depicted below in Table-2.1:
Table-2.1: Results of Audit
Number of deficiencies
Audit Sample
Sr. Nature of Audit Observation noticed
No. (indicative only) Amount Amount in
Number Number
in lakh lakh
1. Excess carry forward of input tax
431 7,865.5 79 1,247.00
credit
2. Excess claim of Transitional
Credit due to mismatch between 592 16,550.69 22 149.91
Annual and Quarterly returns
3. Irregular claim of transitional
592 16,550.69 6 38.29
credit without filing TRAN-2
4. Irregular availing of transitional
credit without filing the ER-1/ST- 431 7,865.5 7 52.71
3 returns

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Number of deficiencies
Audit Sample
Sr. Nature of Audit Observation noticed
No. (indicative only) Amount Amount in
Number Number
in lakh lakh
5. Irregular claim of transitional
credit on goods in stock without 38 636.85 1 9.88
duty paid documents
6. Excess carry forward of Input tax
25 2,441.05 1 9.42
credit on account of capital goods
Significant cases have been detailed in following paragraphs:
2.7 Audit Observations
On the examination of records of Transitional Credit cases in eleven Commissionerates,
certain deficiencies were noticed which are as under:
2.7.1 Excess carry forward of Input Tax Credit of ₹ 1,247.00 lakh
As per Section 140(1) of the CGST Act 2017and SGST Act, 2017, a registered person,
other than a Composition taxpayer, is entitled to take, in his Electronic Credit Ledger,
the amount of VAT credit carried forward in the return relating to the period up to
30 June 2017, furnished under the existing law by filing TRAN 1 return within 90 days
from the appointed day. The registered person shall not be allowed to take the credit
unless the said credit was admissible as VAT Credit under the existing law (HP VAT
Act 2005) and is also admissible as ITC under CGST Act, 2017.
During audit of 11 divisions of HP State Commissionerate, it was noticed that in
79 cases 1 out of 431 selected Transitional Credit cases, transitional credit had been
carried forward in TRAN-1 (under Table 5C) in excess than claimed in the last legacy
return of June 2017. This resulted in excess carried forward transitional credit of
₹ 1247.00 lakh as per detail attached in Appendix-2.1.
This has resulted in non-observance of the provisions of Section 140 of the CGST Act
2017 and SGST Act, 2017.
On this being pointed out (March & April 2021), the DCST&Es concerned stated
(March & April 2021) that the cases of carry forward of transitional credits would be
examined as per applicable GST Act at the time of assessment of cases.
2.7.2 Excess claim of Transitional Credit amounting to ₹ 149.91 lakh due to
mismatch between Annual and Quarterly returns
As per Section 140(1) of the CGST Act 2017 and SGST Act, 2017, a registered person,
other than a Composition taxpayer, is entitled to take, in his Electronic Credit Ledger,
the amount of VAT credit carried forward in the return relating to the period up to
30 June 2017, furnished under the existing law by filing TRAN 1 return within 90 days

1
Chamba one, Hamirpur three, Una nine , Kangra four, Dharmshala two, Nurpur two, Palampur four,
Shimla 11, Sirmaur nine, Baddi 21, Kullu two, Mandi two and Solan nine.

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from the appointed day. The registered person shall not be allowed to take the credit
unless the said credit was admissible as VAT credit under the existing law (HP VAT
Act 2005) and is also admissible as ITC under CGST and SGST Act, 2017.
During audit of 11 divisions of HP State Commissionerate, it was noticed in 22 cases2
out of 592 selected Transitional credit cases, that the ITC balance shown in the Annual
and the Quarterly/ Monthly returns was different. In 21 cases, ITC carried forward in
Quarterly return and TRAN 1 was higher than ITC carried forward in the Annual return
and in one case, ITC carried forward in Annual return and TRAN 1 was higher than
ITC carried forward in Quarterly Return. Thus, the ITC carried forward figures of
Annual/Quarterly return do not match with the figures of TRAN-1. This resulted in
excess ITC claimed as transitional credit in TRAN 1 amounting to ₹ 149.91 lakh in
comparison to the Annual/Quarterly returns as detailed in Appendix-2.2.
On this being pointed out (March & April 2021), the DCST&Es concerned stated
(March & April 2021) that these cases will be examined as per applicable GST Act.
2.7.3 Irregular claim of transitional credit without filing of TRAN-2 ₹ 38.29 lakh
As per the proviso under Section 140(3) of the CGST Act 2017 and SGST Act, 2017
and Rule 117 (4) of the CGST Rules 2017 and SGST Rules, 2017 TRAN 2 can be filed
by the dealer who does not have a VAT invoice for stock held by them on 30 June 2017
to claim tax credit on stock.
During audit of 11 divisions of HP State Commissionerate, it was noticed that in
six cases3 out of 592 selected Transitional Credit cases, no TRAN 2 return was available
on the GSTN portal but transitional credit amounting to ₹ 38.29 lakh had been claimed
in GSTR 9 (annual return) without filing TRAN 2 which was irregular, the details of
which are attached in Appendix-2.3.
On this being pointed out (March & April 2021), the DCST&Es concerned stated
(March & April 2021) that these cases will be examined as per applicable GST Act.
This resulted in non-observance of the provisions of Section 140 of the CGST and
SGST Act, 2017.
2.7.4 Irregular carry forward of ITC without filing Annual Return of
₹ 52.71 lakh
As per Section 140(1) of the CGST Act 2017 and SGST Act, 2017, a registered person,
other than a Composition taxpayer, is entitled to take, in his Electronic Credit Ledger,
the amount of VAT credit carried forward in the return relating to the period up to
30 June 2017, furnished under the existing law by filing TRAN 1 return within 90 days
from the appointed day.

2
Chamba one, Bilaspur two, Una four, Kangra four, Nurpur one, Dharmshala two, Shimla five and
Mandi three.
3
Chamba one, Hamirpur two, Nurpur one, Una one and Shimla one.

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The taxpayer should have filed all the returns for the last six months period immediately
preceding the appointed date.
During audit of 11 divisions of HP State Commissionerate, it was noticed that in seven
cases4 out of 431 selected Transitional Credit cases, the dealers had carried forward ITC
amounting to ₹ 52.71 lakh in the TRAN-1 form without filing the last Annual return
(for the period 2016-2017). The details of which are attached in Appendix-2.4.
On this being pointed out (March & April 2021), the DCST&Es concerned stated
(March & April 2021) that these cases would be examined as per applicable GST Act.
This resulted in non-observance of the provisions of Section 140 of the CGST Act,
2017 and the SGST Act, 2017.
2.7.5 Irregular carry forward of transitional credit under table 7(c) and
irregular claim of ITC of ₹ 9.88 lakh
As per Section 140 of the GST Act, 2017, a registered person, other than a Composition
taxpayer, is entitled to take, in his Electronic Credit Ledger, the amount of VAT credit
carried forward in the return relating to the period up to 30 June 2017, furnished under
the existing law by filing TRAN 1 return within 90 days from the appointed day.
As per section 140(3), a registered person, who was not liable to be registered under
the existing law, or who was engaged in the manufacture of exempted goods or
provision of exempted services, or who was providing works contract service shall be
entitled to take, in his electronic credit ledger, credit of eligible duties in respect of
inputs held in stock and inputs contained in semi-finished or finished goods held in
stock on the appointed day.
During audit of 11 divisions of HP State Commissionerate, it was noticed that in one
case5 out of 38 selected samples, the input tax credit as per the last legacy return was
₹ 11.69 lakh. However, scrutiny of TRAN-1 revealed that total claim of ₹ 21.57 lakh
(₹ 9.88 lakh in table 5c and ₹ 11.69 lakh in table 7c) was carried forward as input tax.
The scrutiny of return/invoices revealed that only ₹ 11.69 lakh was admissible as input
tax credit under 5c instead of table 7c which resulted in irregular claim of input tax
credit of ₹ 9.88 lakh.
On this being pointed out (March & April 2021), the DCST&E Baddi stated that (March
& April 2021) the proper officer concerned has been directed to look into the matter
and the outcome would be intimated.
2.7.6 Carry forward of Input tax credit on account of capital goods without
supporting documents
Rule 140(2) provides that a registered person other than opting to pay tax under
section 10, shall be entitled to take in his electronic credit ledger, credit of the unavailed

4
Chamba one, Hamirpur two, Una two, Kangra one and Palampur one.
5
M/s Smilax Pharmaceuticals, Baddi (GSTIN 02ACNPG5021C1ZD).

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input tax credit in respect of capital goods not carried forward in return furnished under
the existing law by him, for the period ending with the day immediately preceding the
appointed day. The unavailed input tax credit means the amount that remains after
subtracting the amount of input tax credit already availed in respect of capital goods
under the existing law. As per Section 11 (6) of HP VAT Act 2005, the input tax credit
on capital goods shall be limited to plant and machinery directly connected with the
manufacturing or processing of the finished goods, the input tax credit as admissible
under this section shall commence from the date of commencement of commercial
production and shall be adjusted against tax payable on turnover of sales over a period
of three years.
Scrutiny of records of TRAN-1 of the dealers of Shimla district revealed in one case6
that as per the List of Purchases (LP_1) document the tax paid on purchase of capital
goods was ₹ 5.55 lakh. Further, the dealer had not shown any other purchase of capital
goods during last three years hence, no unavailed ITC on capital goods of previous
years was available. The dealer had claimed ITC of ₹ 5.55 lakh in last quarterly return
ending June 2017, which was available to be carried forward to TRAN-1. However, the
dealer had also claimed ₹ 9.42 lakh under table 6B in TRAN-1 as unavailed credit on
capital goods. Thus, ITC of ₹ 9.42 lakh was carried forward in excess than available.
2.7.7 Non-production of records
During audit of the eleven divisions of HP State Commissionerate, 592 cases of
transitional claims were checked and records of 92 taxpayers viz., invoices, books of
accounts for verification of claims in respect of transitional credits relating to unavailed
credit on capital goods, Credit on duty paid stock and Input/Input Services in transit
were not made available to Audit. In the absence of these records, Audit could not verify
the correctness of transitional claims of ₹ 3.43 crore of these dealers.
The records were requested (from February 2021 to April 2021) from the Excise and
Taxation department, HP Shimla and the reply of the Department was awaited
(August 2022).
2.8 Conclusion
There were instances of excess carry forward of input tax credit than the last legacy
returns and excess claims of transitional credits due to mismatch between Annual and
Quarterly returns. It was noticed that transitional credits were allowed without filing of
requisite returns. Further, transitional credit on goods in stock was allowed without duty
paid documents and excess carry forward of Input tax credit on capital goods was
allowed. All these deviations resulted in loss of revenue to the State Government.

6
Shivin C A Store (GSTN NO. 02ADEFS7502G1ZF).

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The Audit findings mentioned in Paragraphs 2.7.1 to 2.7.5 were referred to the State
Government in January 2022 while that mentioned in Paragraph 2.7.6 was referred in
April 2022 and reply was awaited for all Audit findings (August 2022).
2.9 Recommendation
A risk-based verification of Transitional Credit cases may be carried out by the
department in time bound manner.

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