Section 140 of GST Act: Transitional arrangements for input tax credit

Explanation of CGST Section 140(1)

1. Eligibility for Carry Forward of CENVAT Credit:

• A registered person (except those opting for the composition scheme under Section 10) is allowed to carry forward the balance of CENVAT credit available in the return filed under the previous tax laws (excise and service tax) as of the day before the appointed date of GST implementation (i.e., July 1, 2017).
• This credit is transferred to the electronic credit ledger of the registered taxpayer.

2. Conditions for Availing Credit:
The carry-forward of credit is subject to certain conditions:

✅ Credit should be admissible under GST law – If the credit was allowed under the previous regime but is not permitted under GST, it cannot be carried forward.
✅ All past returns must be filed – The taxpayer must have filed all returns for the last six months under the earlier tax laws.
✅ No credit for exempted goods – If the credit pertains to goods that were manufactured and cleared under an exemption notification, then such credit cannot be claimed under GST.

3. Implications:

• This section ensures a smooth transition from the old tax regime (Excise, VAT, and Service Tax) to GST.
• It prevents businesses from claiming ineligible or unreported credit.
• It safeguards revenue by ensuring compliance with past return filings.

Explanation of CGST Section 140(2)

1. Eligibility for Carry Forward of Unavailed CENVAT Credit on Capital Goods

• A registered person (excluding those opting for the composition scheme under Section 10) is allowed to carry forward the unavailed CENVAT credit on capital goods into the electronic credit ledger under GST.
• This applies to credit that was not carried forward in the last return filed under the old tax laws (Excise/Service Tax) before the appointed date (July 1, 2017).

2. Conditions for Availing Credit

The carry-forward of unavailed CENVAT credit is allowed only if:
✅ The credit was admissible under the previous law – If the CENVAT credit was not allowed under the old tax regime, it cannot be claimed under GST.
✅ The credit is also admissible under GST – Even if the credit was allowed under the old regime, it must also be eligible for Input Tax Credit (ITC) under the GST law.

3. Meaning of “Unavailed CENVAT Credit”

The term “unavailed CENVAT credit” refers to the remaining credit on capital goods that was not yet claimed under the old tax system.

📌 Formula to Calculate Unavailed CENVAT Credit: Unavailed CENVAT Credit=Total Eligible Credit on Capital Goods−Credit Already Availed\text{Unavailed CENVAT Credit} = \text{Total Eligible Credit on Capital Goods} – \text{Credit Already Availed}

4. Example for Better Understanding

A company purchased machinery in April 2017 for ₹10,00,000. Under the previous Excise law, CENVAT credit on capital goods was available in two installments:

• First year (2017-18): 50% of the credit could be claimed
• Second year (2018-19): The remaining 50% could be claimed

If the company availed only 50% (₹1,00,000) before July 1, 2017, then the remaining ₹1,00,000 (unavailed credit) can be carried forward and claimed under GST.

5. Key Takeaways

✅ Allows businesses to transition their unclaimed capital goods credit into GST
✅ Ensures that only eligible credit is carried forward
✅ Prevents misuse by disallowing credit that was not permitted under both laws.

Explanation of CGST Section 140(3)

This section provides input tax credit (ITC) on stock for certain categories of registered persons who were not eligible for credit under the old tax regime but became eligible under GST.

1. Who Can Avail ITC Under Section 140(3)?

The following categories of registered persons can claim credit of eligible duties on inputs held in stock (including semi-finished and finished goods) on the appointed date (July 1, 2017):

✅ Businesses that were not required to register under the old tax regime (e.g., small businesses below the VAT/excise/service tax threshold).
✅ Manufacturers of exempted goods – Businesses producing goods that were earlier exempt from tax but are now taxable under GST.
✅ Providers of exempted services – Service providers offering services that were previously tax-free but are now taxable.
✅ Works contractors under Notification No. 26/2012-Service Tax – These were service providers who had availed of a reduced tax rate under the old law.
✅ First-stage and second-stage dealers – These are traders who purchase goods from manufacturers and resell them.
✅ Registered importers – Importers who were not able to claim excise duty credit earlier.
✅ Depots of manufacturers – Manufacturer depots that distribute goods but could not avail credit previously.

2. Conditions for Availing ITC on Stock

The registered person can claim credit only if all the following conditions are met:

1️⃣ Goods are meant for taxable supplies – The stock (inputs, semi-finished, or finished goods) should be used for making taxable supplies under GST (not exempt or non-taxable supplies).
2️⃣ Eligibility for ITC under GST – The inputs should qualify for ITC under the GST law.
3️⃣ Possession of Duty-Paid Invoice – The person must have a valid invoice or document proving that duty was paid under the previous tax regime.
4️⃣ Invoice Not Older Than 12 Months – The purchase invoice of inputs should not be dated earlier than 12 months before the GST rollout (i.e., before July 1, 2016).
5️⃣ No Abatement for Service Providers – If a service provider was availing of tax abatement under the old law, they cannot claim ITC under this section.

3. Special Provision for Traders Without Invoices

🔹 If a trader (not a manufacturer or service provider) does not have invoices proving duty payment, they may still be allowed credit at a reduced rate, provided they:

• Follow prescribed rules, safeguards, and conditions.
• Pass on the benefit of ITC to customers by reducing prices.

This provision mainly benefits small traders who purchased stock from unregistered suppliers under the old tax system and lack proper invoices but now fall under GST compliance.

4. Example for Better Understanding

Scenario 1: A Small Retailer Now Under GST

• Before GST, a small retailer (annual turnover ₹15 lakh) did not need to register under VAT or excise.
• On July 1, 2017, he had ₹5 lakh worth of stock for which excise duty was already paid by the manufacturer.
• Under Section 140(3), he can claim ITC on this stock, provided he has invoices dated after July 1, 2016.

Scenario 2: A Trader Without Invoices

• A trader had ₹10 lakh worth of stock but did not have invoices proving excise duty payment.
• Under the proviso to Section 140(3), the government prescribed a reduced credit percentage, allowing him to claim a portion of ITC while ensuring customers benefit through lower prices.

5. Key Takeaways

✔ Supports businesses transitioning into GST by allowing ITC on existing stock.
✔ Prevents loss of input tax credit for those who were exempt or unregistered earlier.
✔ Ensures only genuine ITC claims through strict invoice and compliance requirements.
✔ Provides an alternative for traders without invoices through a reduced credit mechanism.

Explanation of CGST Section 140(4)

This section applies to registered persons who were engaged in both taxable and exempted goods/services under the old tax regime but whose exempted goods or services have now become taxable under GST. It allows them to claim input tax credit (ITC) on past taxes paid.

1. Who Can Avail ITC Under Section 140(4)?

This section benefits businesses that were:
✅ Manufacturing both taxable and exempted goods under the Central Excise Act, 1944.
✅ Providing both taxable and exempted services under the Finance Act, 1994 (Service Tax).
✅ The exempted goods/services under the old regime are now taxable under GST.

For example, under the old tax laws:

• Some goods were exempt from excise duty, but GST now applies to them.
• Some services had partial or full service tax exemptions, but they are now taxable under GST.

2. ITC Available in Two Parts

Under this section, such businesses can claim ITC in two ways:

(a) Credit Carried Forward from Previous Returns

• They can carry forward the CENVAT credit that was already available in the last return filed under the previous tax law.
• This is allowed as per Section 140(1), meaning:
  ✅ The credit must be eligible under both old and new tax laws.
  ✅ All returns for the past six months must be filed under the old tax system.
  ✅ Goods should not have been exempted under specific notifications.

(b) ITC on Inputs in Stock for Exempted Goods/Services

• They can claim ITC on stock, including semi-finished or finished goods related to their previously exempted products or services.
• This is allowed as per Section 140(3), meaning:
  ✅ The stock must be used for taxable supplies under GST.
  ✅ The taxpayer must have valid invoices (not older than 12 months before GST implementation) proving duty payment.
  ✅ The taxpayer must be eligible for ITC under GST rules.

3. Example for Better Understanding

Scenario: A Manufacturer of Both Taxable & Exempted Goods

• A company manufactured both taxable and exempted goods before GST.
• It had ₹2 lakh CENVAT credit in its last excise return.
• On July 1, 2017, it had ₹5 lakh worth of raw materials and finished stock related to previously exempt goods, which are now taxable under GST.
• Under Section 140(4), the company can:
  ✅ Carry forward ₹2 lakh CENVAT credit into the GST system.
  ✅ Claim ITC on the stock of ₹5 lakh related to previously exempt goods.

4. Key Takeaways

✔ Smooth transition to GST for businesses handling both taxable and exempted goods/services under the old system.
✔ Prevents loss of ITC by allowing carry-forward of past credit and stock-related ITC.
✔ Ensures businesses get tax relief for previously exempt goods/services that are now taxable under GST.

Explanation of CGST Section 140(5)

This section allows a registered person to claim input tax credit (ITC) on inputs or input services that were received after the appointed day (July 1, 2017) but for which tax was already paid under the previous tax regime by the supplier.

1. When Does This Apply?

This provision is useful when:
✅ Goods or services were in transit before GST but received after July 1, 2017.
✅ The supplier had already paid excise duty, VAT, or service tax under the old law.
✅ The recipient records the invoice in their books within 30 days of the appointed day.

📌 Example

• A company orders raw materials on June 28, 2017, but they are delivered on July 3, 2017.
• The supplier had already paid excise duty and VAT under the old tax system.
• The buyer (recipient) can still claim ITC on these inputs, provided the invoice is recorded within 30 days (i.e., by July 31, 2017).

2. Conditions for Claiming Credit

To claim credit under Section 140(5), the following conditions must be met:

1️⃣ The inputs or input services were received after July 1, 2017, but tax was paid under the previous law.
2️⃣ The invoice or duty-paying document must be recorded in the recipient’s books within 30 days of GST implementation (by July 31, 2017).
3️⃣ Commissioner can extend this period by another 30 days (i.e., up to August 30, 2017), if the recipient provides a valid reason.
4️⃣ The recipient must submit a prescribed statement of the ITC claimed under this section.

3. Key Takeaways

✔ Prevents tax loss on goods/services stuck in transit during GST transition.
✔ Ensures businesses can claim ITC on purchases made before GST but received later.
✔ Requires timely documentation—invoices must be recorded within 30 days (extendable up to 60 days).

Explanation of CGST Section 140(6)

This section provides relief to businesses that were earlier paying tax at a fixed rate or a fixed amount under the old tax system but have now migrated to the regular GST regime. It allows them to claim input tax credit (ITC) on their stock as of the appointed day (July 1, 2017).

1. Who Can Claim ITC Under Section 140(6)?

This applies to businesses that were:
✅ Under a Composition Scheme or a fixed tax system in the pre-GST era – They were paying a fixed tax rate or amount instead of regular tax under VAT, Excise, or Service Tax laws.
✅ Now registered under the regular GST system – They are no longer under Section 10 (Composition Scheme under GST) and are required to pay tax under normal GST rules.

2. What ITC Can Be Claimed?

Eligible businesses can claim ITC on:

• Inputs held in stock
• Inputs contained in semi-finished goods
• Inputs contained in finished goods

👉 Note: This does not cover ITC on capital goods or input services.

3. Conditions for Availing ITC

To claim ITC under Section 140(6), the registered person must meet these conditions:

1️⃣ Goods must be used for taxable supplies under GST (not exempt or non-taxable).
2️⃣ The person must not be paying tax under Section 10 (GST Composition Scheme).
3️⃣ The inputs should be eligible for ITC under GST law (e.g., no ITC for motor vehicles, personal expenses, etc.).
4️⃣ Valid invoices or duty-paid documents must be available as proof of tax payment under the old law.
5️⃣ Invoices must not be older than 12 months before July 1, 2017 (i.e., invoices should be dated after July 1, 2016).

4. Example for Better Understanding

Scenario: A Trader Under the Old Composition Scheme

• Before GST, a small trader was under the VAT composition scheme, paying a fixed 1% tax on turnover instead of regular VAT.
• On July 1, 2017, he had ₹5 lakh worth of stock on which VAT and excise had already been paid by the supplier.
• Since he opted out of composition and into regular GST, he can now claim ITC on this stock, provided:
  ✅ The goods are used for taxable supplies under GST.
  ✅ He has valid invoices dated after July 1, 2016.

5. Key Takeaways

✔ Ensures fair ITC benefit for businesses transitioning from a fixed-tax regime to regular GST.
✔ Prevents tax loss on stock for businesses that were previously ineligible for ITC.
✔ Strict compliance requirements—ITC is allowed only if invoices are available and not older than 12 months.

Explanation of CGST Section 140(7)

This section specifically applies to Input Service Distributors (ISDs) and allows them to carry forward and distribute unutilized input tax credit (ITC) on services received before GST implementation (i.e., before July 1, 2017).

1. Who Does This Apply To?

This provision applies only to Input Service Distributors (ISDs)—entities that receive input services centrally and distribute the ITC to their branches or units.

📌 Example of an ISD:

• A company with multiple branches (e.g., a telecom company) receives a common consulting service at its head office.
• Under the old system, it could distribute CENVAT credit of service tax paid to its branches.
• This section ensures that even after GST implementation, any pre-GST ITC on such services can still be distributed.

2. What Does This Section Allow?

✅ ITC on services received before GST can still be distributed under GST rules.
✅ Invoices can be received before, on, or after July 1, 2017—the timing of invoice receipt doesn’t affect ITC distribution.
✅ The distribution must follow the prescribed rules and time limits under GST.

3. Key Takeaways

✔ Ensures a smooth transition for ISDs carrying forward service-related ITC.
✔ Allows ITC distribution even if invoices arrive after GST implementation.
✔ Prevents tax loss by allowing ITC on past service tax payments to be utilized.

Explanation of CGST Section 140(8)

This section applies to businesses that had centralized registration under the old tax system (such as under Service Tax or Excise Duty) and have now obtained separate GST registrations for different states. It allows them to carry forward and distribute unutilized CENVAT credit into GST.

1. Who Does This Apply To?

This provision is relevant for businesses that:
✅ Had centralized registration under the previous law (e.g., service providers with operations in multiple states but a single Service Tax registration).
✅ Have now obtained multiple GST registrations—since GST requires state-wise registration, businesses that earlier operated under a centralized system must now register separately in each state.

📌 Example:
A company providing IT services had a centralized Service Tax registration in Delhi before GST. Under GST, it must register separately in each state where it operates. Section 140(8) allows the company to transfer its unutilized CENVAT credit to these new GST-registered entities.

2. Conditions for Availing ITC Transfer

To carry forward and distribute CENVAT credit, the following conditions must be met:

1️⃣ The credit must have been carried forward in the last return filed before July 1, 2017.
2️⃣ The final return under the old law must be filed within three months (by September 30, 2017).
3️⃣ If filing a revised return, the credit claimed should be equal to or lower than the original return (i.e., no additional credit claims).
4️⃣ The credit must be admissible under GST—if a credit was not eligible under GST law, it cannot be transferred.
5️⃣ The credit can be transferred to multiple GST registrations belonging to the same PAN.

3. Key Takeaways

✔ Allows smooth ITC transition for businesses that had centralized registration.
✔ Prevents loss of input tax credit when migrating to GST.
✔ Ensures fair distribution of past credit among new GST-registered entities.
✔ Mandates timely compliance—returns must be filed within 3 months for ITC to be allowed.

Explanation of CGST Section 140(9)

This section provides relief to businesses that had reversed their CENVAT credit on input services under the old tax law due to non-payment to the supplier within three months. It allows them to reclaim the credit under GST if they make the payment within three months from the appointed day (July 1, 2017).

1. Why Was CENVAT Credit Reversed?

Under the old Service Tax rules, businesses could avail CENVAT credit on input services, but:

• If they did not pay the supplier within 3 months, they had to reverse the credit.
• This ensured that credit was only claimed when payments were actually made.

Section 140(9) allows businesses to get back that reversed credit if they clear the outstanding payment within 3 months from July 1, 2017 (i.e., by September 30, 2017).

2. Conditions for Reclaiming ITC

To reclaim the reversed CENVAT credit, a registered person must:

✅ Have previously availed and reversed CENVAT credit due to non-payment.
✅ Make the payment to the supplier within three months from July 1, 2017.
✅ Follow the prescribed procedure and timelines for reclaiming the credit.

📌 Example:

• A company availed CENVAT credit of ₹50,000 in May 2017 for IT consultancy services.
• It did not pay the consultant within three months (i.e., by August 2017), so it had to reverse the credit.
• Under GST, if the company pays the consultant by September 30, 2017, it can reclaim the ₹50,000 credit in its electronic credit ledger.

3. Key Takeaways

✔ Ensures businesses don’t lose ITC on past transactions just because of payment delays.
✔ Encourages timely payments to suppliers during the GST transition.
✔ Provides a structured approach to reclaiming ITC while ensuring compliance.

Explanation of CGST Section 140(10)

This section acts as a clarification and procedural provision for calculating the input tax credit (ITC) under Sections 140(3), 140(4), and 140(6). It states that the method for calculating the credit will be prescribed by rules and regulations, ensuring uniformity and compliance.

1. Which Sections Does This Apply To?

📌 Section 140(3) – ITC for businesses that were:
✅ Not registered under the old tax regime.
✅ Dealing in exempt goods/services that have become taxable under GST.
✅ First-stage and second-stage dealers, importers, and depots claiming ITC on stock.

📌 Section 140(4) – ITC for businesses that:
✅ Were manufacturing both taxable and exempt goods or providing both taxable and exempt services.
✅ Can claim ITC on inputs used for previously exempt supplies that are now taxable under GST.

📌 Section 140(6) – ITC for businesses that:
✅ Were under a composition scheme or fixed tax system under the old law.
✅ Have moved to the regular GST system and can claim ITC on stock and finished goods.

2. Why Is This Important?

Since different types of businesses and tax structures existed before GST, a standardized method is required for calculating:

• The amount of ITC that can be claimed under each scenario.
• The percentage of eligible credit based on stock valuation or tax-paid status.
• Conditions and documentation requirements for availing the credit.

🔹 The CGST Rules provide detailed formulas and methods for such calculations to ensure fairness and compliance.

3. Key Takeaways

✔ Ensures clarity and uniformity in ITC calculation.
✔ Prevents misuse by setting specific rules for different cases.
✔ Facilitates a smooth transition from the old tax regime to GST.

Summary of Explanation 1

For the purposes of Sections 140(1), 140(3), 140(4), and 140(6), the term “eligible duties” refers to specific duties that can be carried forward as input tax credit (ITC) under GST. These include:

1️⃣ Additional Excise Duty under the Additional Duties of Excise (Goods of Special Importance) Act, 1957.
2️⃣ Additional Customs Duty (CVD) under Section 3(1) of the Customs Tariff Act, 1975.
3️⃣ Special Additional Duty (SAD) under Section 3(5) of the Customs Tariff Act, 1975.
4️⃣ Excise Duty as per the First Schedule of the Central Excise Tariff Act, 1985.
5️⃣ Excise Duty as per the Second Schedule of the Central Excise Tariff Act, 1985.
6️⃣ National Calamity Contingent Duty (NCCD) under the Finance Act, 2001.

These duties apply to inputs held in stock, semi-finished goods, and finished goods as of the appointed day (July 1, 2017).

📌 Note: Clause (iv) was omitted by the CGST (Amendment) Act, 2018.

Summary of Explanation 2

For the purposes of Sections 140(1) and 140(5), the term “eligible duties and taxes” includes specific excise duties, customs duties, and service tax that can be carried forward as input tax credit (ITC) under GST. These include:

1️⃣ Additional Excise Duty under the Additional Duties of Excise (Goods of Special Importance) Act, 1957.
2️⃣ Additional Customs Duty (CVD) under Section 3(1) of the Customs Tariff Act, 1975.
3️⃣ Special Additional Duty (SAD) under Section 3(5) of the Customs Tariff Act, 1975.
4️⃣ Excise Duty as per the First Schedule of the Central Excise Tariff Act, 1985.
5️⃣ Excise Duty as per the Second Schedule of the Central Excise Tariff Act, 1985.
6️⃣ National Calamity Contingent Duty (NCCD) under the Finance Act, 2001.
7️⃣ Service Tax under Section 66B of the Finance Act, 1994, applicable to inputs and input services received on or after July 1, 2017.

📌 Note: Clause (iv) was omitted by the CGST (Amendment) Act, 2018.

Summary of Explanation 3

This clarification states that the term “eligible duties and taxes” excludes:

1️⃣ Any cess not mentioned in Explanation 1 or Explanation 2 (e.g., Swachh Bharat Cess, Krishi Kalyan Cess).
2️⃣ Any cess collected as an additional duty of customs under Section 3(1) of the Customs Tariff Act, 1975.

📌 Key Takeaway: Cesses that were levied under the previous tax regime cannot be carried forward as ITC under GST, unless they are explicitly listed in Explanation 1 or 2.