Traders likely to keep input tax credit on old stocks in GST revamp

As India prepares to move towards GST 2.0, the government is expected to allow businesses to carry forward accumulated input tax credit (ITC) on existing inventories to prevent companies from losing credit on goods purchased at higher rates.

 

The GST Council is also likely to update the tax administration system to ensure a smooth transition and shield businesses from additional costs.

 

“As we move towards the GST overhaul, our objective is to ensure a seamless transition for businesses. Allowing the carry forward of accumulated ITC on existing inventory will safeguard companies from any tax disadvantage arising due to rate rationalisation. The updated IT systems will ensure smooth credit transfer and prevent additional costs for taxpayers,” a government official familiar with the matter said.

 

An email sent to the finance ministry remained unanswered until the time of going to press.

 

Take, for instance, Company A, a trader in solar modules holding ₹100 crore worth of inventory and an ITC balance of ₹12 crore. At present, solar modules attract 12 per cent GST, but under the proposed regime the rate will fall to 5 per cent. With profitability assumed at 10 per cent, the company would pay ₹5.5 crore (5 per cent of ₹110 crore) in GST, leaving ₹6.5 crore of ITC accumulated after liquidation of stock. “The company will not have any option of liquidating the remaining ITC. This would mean that traders and industry at large, wherever a GST rate reduction is expected, would attempt to liquidate their inventories before the GST overhaul unless a solution is built into the rate rationalisation exercise,” said Vivek Jalan, partner at Tax Connect Advisory.

 

A 2020 circular from the Central Board of Indirect Taxes and Customs (CBIC) had clarified that refunds of accumulated ITC would not be permitted where a business was essentially buying and selling the same goods, and the build-up of credit occurred only because of a rate cut. In cases where GST was paid at a higher rate on purchases but charged at a lower rate on sales, the excess credit would remain locked. Experts warn that while such changes in a handful of products may not create widespread disruption, a comprehensive rate rationalisation under GST 2.0 could trigger a serious liquidity squeeze for businesses.

 

Smita Singh, partner at S&A Law Offices, said the GST 2.0 announcement raised critical considerations for companies holding inventory bought at higher rates. “During the GST transition from the erstwhile indirect tax regime and subsequent tax rate amendments, businesses were allowed to carry forward existing accumulated ITC and were not asked to reverse it. We expect a similar approach to be adopted to maintain continuity and protect working capital. However, the technicalities and processes will only be clear once the GST Council and CBIC issue instructions, and businesses must closely monitor developments for smooth compliance during the transition,” she added.