Before I answer the question, I will further re-phrase it for readers for better understanding and consumption. Here our intention is to know “What happens to the stock, lying on the day before GST roll-out” and “What stock treatment should be done to make the transition smooth”?

The answer to the first question is simple. Let’s consider that GST gets implemented from 1st of July 2017. Now assuming that a businessman has Rs. 15 lakh worth of goods lying in his warehouse/Shop/Showroom etc on 30th of June, 2017. What happens to the VAT paid at the time of purchase of this stock? Assuming that Rs. 2.25 lakh is the amount of VAT paid on these goods, the question that comes to mind is, how can we adjust this VAT credit against the GST liability in future?

The GST Council, which is essentially a group of finance ministers of all the states has laid down transition and input credit rules, to help transit from current taxes such as VAT, Services Tax, Excise Duty into GST Regime.

These rules clearly state that any amount of credit lying in goods or input services under current regime can be carried forward under the new GST regime as GST credit provided the following conditions are fulfilled:

  1. The taxpayer has filed his last return under applicable law (VAT, Services Tax, Excise) and has declared the complete stock lying along with input credit.
  2. Such goods which are shown as stock in VAT return must be taxable under GST regime, in case such goods or services are exempt, non-taxable, the taxpayer will not be eligible to carry forward the credit under GST.
  3. Stock must be used in furtherance of business. In case the stock carried forward along with GST credit is not used in furtherance of business, the taxpayer will be denied the credit of GST and will be required to pay such amount to authorities.

Once we have identified the conditions, let’s look into the details of what needs to be done at taxpayer’s end.

All the taxpayers registered under VAT, Services Tax or Excise must:

  1. File the last return under the current regime with utmost due diligence. Make sure that you account your complete stock in your return. In case you missed to report any stock, your credit will not transit from current regime and eventually, there will be a risk of losing this credit.
  2. Document all the invoices with respect to purchases under the previous regime. This will help you claim 40% of your credit in case you miss to include this stock in your last return.

Transition into GST requires an extensive due diligence at taxpayer’s end.

In case you have further doubts, put your queries in the comment box and I’ll answer it for you.