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InventoryThere is a lot of apprehension about what to do with inventory before GST kicks in. Some people are of the opinion that inventory should be increased. Others are of the view that inventory should be reduced. Many are apprehensive that there will be loss due to increase in tax rates under GST Vis a Vis the existing rates.

This article first discusses legal provisions and then deals with what could be the possible consequences and courses of action available before businesses. This article does not deal with centralized registration, input service distributor etc.

Normal supplier:

Let us examine various transitional provisions pertaining to stock under GST. As per section 140(3) of the CGST Act which is reproduced verbatim hereinafter

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 and was availing of the benefit of notification No. 26/2012—Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, 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 subject to the following conditions, namely:––

  1. such inputs or goods are used or intended to be used for making taxable supplies under this Act;
  2. the said registered person is eligible for input tax credit on such inputs under this Act;
  3. the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;
  4. such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and
  5. the supplier of services is not eligible for any abatement under this Act

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.

The above provisions are self -explanatory and most of the normal businesses would be covered by the aforesaid provisions

Composition Supplier:

As per section 140(6) of the CGST Act relevant for composition suppliers which is reproduced verbatim hereinafter

A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law 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 subject to the following conditions, namely:––

  1. such inputs or goods are used or intended to be used for making taxable supplies under this Act;
  2. the said registered person is not paying tax under section 10;
  3. the said registered person is eligible for input tax credit on such inputs under this Act;
  4. the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of inputs; and
  5. such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.

The above provisions are self -explanatory and most of the composition businesses would be covered by the aforesaid provisions.
For sections 140(3) and 140(6) aforesaid discussed the expression “eligible duties” means––

  1. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
  2. the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
  3. the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975; the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
  4. the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;
  5. the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and
  6. the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001,
    in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.

There are similar provisions under the SGST Act wherein input credit will be available for VAT paid where final product is VAT exempt.

So the apprehension that there will be a loss under GST due to increase in rates over the existing rates is misplaced. If at all the business that has large inventory will be entitled to credit which was hitherto unavailable to it and in fact it would put it in an advantage in comparison to a competitor with minimal stock if we were to analyze solely from the perspective of indirect taxes.

In fact its products would be cheaper compared to the competitors if it passes the benefit to the customer. Also there cannot be a loss due increase in the GST rates because these are indirect taxes and the businesses are entitled pass the entire incidence to the end consumer. So there is no loss from that perspective also.

So now the billion dollar question is that if there so many benefits whether the businesses should increase the inventory?

The answer to this question would be that inventory decisions should not be taken merely from the perspective of tax. There are many other associated costs pertaining to inventory such as finance cost, storage cost, obsolescence cost etc. If based on the overall analysis it appears that businesses should increase the inventory they should or reduce the inventory if it is more beneficial for the business.

This article should not be taken as a professional advice and the readers are expected to exercise discretion and take professional advice before taking any fixed course of action. The author will not be liable for any loss for any person acting merely on the basis of this article.

ca rishabhkumarThe author is a fellow member of the Institute of Chartered Accountants of India and also a qualified Company Secretary. The author has also done DISA(ICAI), certificate on IFRS (ICAI), Certificate on Forex and Treasury Management (ICAI), Certificate on Forensic Accounting and Fraud Prevention (ICAI). The author practices as a Chartered Accountant under the name and style of Rishabh Kumar Barmecha and Associates and is an expert in auditing, financial investigation, direct and indirect taxation. The author can be reached at rishabhkumarbarmecha@gmail.com or 91 9007909221 or Twitter @CARKBarmecha.
CA Rishabh Kumar Barmecha

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One thought on “What to do with Inventory Before GST kicks in ?

  1. Munaf Shaikh says:

    In composition scheme , dealer can claim itc on closing stock?

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