Having both taxable and exempt supplies – notable differences vis a vis the current law

GST is a value added tax which provides for adjusting GST paid on purchases and expenses, against GST payable on output supplies. The impending GST implementation is widely considered to have a liberalized credit mechanism which decently ensures free flow of credit across the value chain.

However, where a supplier is engaged in making exempt supplies, he becomes ineligible for input tax credit. The computation becomes a bit cumbersome where the supplier is engaged in providing taxable and exempt supplies.

Here we take a look inside the GST provisions to highlight certain notable differences vis a vis the current provisions of Rule 6 of the CENVAT credit rules, 2004.

Option to pay 6%/7% of the exempted turnover

The provisions of CENVAT rules gives two options to a person engaged in making taxable and exempt supply. One of the options is to reverse credit calculated at 6% of exempted goods and 7% of exempted services. This is always an easy option to follow, but it does also have its flaw. In a labor intensive industry, the CENVAT credit on inputs and input services, as a percentage of turnover is usually less than 6%/7% percentage. This makes this option generally less popular among most of the manufacturers / service providers. The GST ITC rules have completely omitted this option, thus leaving behind the procedure to take credit on proportionate basis.

Trading of goods is no more considered exempt services

This was an expected change and will benefit persons engaged in trading of goods along with manufacture of goods / provision of services. Trading of goods is considered an exempt service under the CENVAT rules and attracts a credit reversal. This particularly affects credit on common input services.

GST is a tax on supply and thus wipes out the concept of manufacture. Therefore it entitles a trader of goods also to avail benefit of credit on input services.

A boon for exporter of exempted goods

The issue of whether an exporter of exempted goods is allowed to take CENVAT credit has a long history. After a few judgments in favour of assesse, the CBEC amended the excise rules disallowing an exporter of exempted goods to export goods under bond procedure. This disentitled such a person to avail CENVAT credit, forcing him to go for the option to avail rebate of duties paid on inputs. Thus there was no procedure (except all India drawback rates) for him to get a of service tax paid on input services. It may be noted that this restriction was not applicable to an exporter of exempt services.

The provisions of Section 16 of the IGST Act, 2017 make it very clear that exporter of exempt goods will also be entitled to input tax credit on inputs, input services and capital goods, and he claim refund of unutilized credit. This is subject to a condition that such person is registered under the GST law.

Partial credit where capital goods used partially for exempted goods and partially for taxable goods

This will be significant change in the credit rules in favor of the revenue. The CENVAT rules allowed full credit even where capital goods were partly used for manufacture of taxable goods / taxable services and partly for exempt goods / services.

However, Rule 8 of the draft GST ITC rule prescribe only proportionate credit where capital goods are used for both taxable and exempt supplies. The rules fix the life of capital goods at 5 years for the computations. This could have significant implications for companies who manufacture exempt and taxable goods and have recently claimed full CENVAT credit on purchase of capital goods.

It can be seen that there are decent amount of changes in the ITC provisions and one need to study and understand them thoroughly to be prepared for the upcoming change.