GST: Despite increase in transitional tax credit limit, destocking may continue

In an attempt to minimize losses arising out of the mismatch between tax payout and tax refund, goods and services tax (GST) transition rules for claiming tax credit on old stock have been amended. The deemed transition credit limit has been raised from the proposed 40% to 60% of the Central GST liability (CGST) for products that attract a tax rate of 18% and above. This also applies to products that cost more than Rs25,000 and bear a brand name of the manufacturer and are serially numbered, like automobile, refrigerators, automobile, mobile phones etc.

A dealer in these goods who doesn’t have a manufacturer’s invoice containing the serial number of the goods is eligible for 60% deemed transitional credit. On the other hand, dealers who manage to submit all the relevant documents can claim 100% deemed transitional credit on them.

The industry was hoping for a deemed credit limit of 70%, said tax experts. It should be noted that when the transition from the sales tax regime to value-added tax (VAT) had happened, the deemed transition credit limit was fixed at 80%.

Meanwhile, for products below the Rs25,000 threshold and below 18% tax rate category such as low-value consumer durables and FMCG products, the deemed transition credit limit remains at 40%.

To be sure, the upward revision in deemed transition tax credit limit is a welcome move and comes as a relief. However, tax experts and brokerages feel this step partially addresses destocking concerns in the supply chain mainly because not all dealers may have maintained documents, so they may not want to opt for the tedious process of claiming the tax benefit. Hence, they fear, the GST-led disruption reported in various sectors is likely to continue.

“This is better than 40% decided earlier but the trade, we believe, would continue to prefer destocking and starting afresh post rollout rather than having to deal with procedural aspects to claim credit on pre-GST inventories,” said a recent JM Financial Research report.

Also, the law requires those who will claim credit without documents to pass on the benefit of credit by way of reduced prices. So, traders may be tempted to liquidate the stock or return them to avoid going the refund route, Archit Gupta, founder and chief executive officer of ClearTax.com said.

But, according to M.S. Mani, senior director-indirect tax, Deloitte Haskins & Sells LLP, the disruption in trade in certain cases and discounts on some products is partly to do with getting rid of slow moving inventory.

To conclude, whatever the case may be, an adverse impact on India Inc.’s production cycles and thereby earnings cannot be ruled out. How severe will the hit be on corporate balance sheets and the economy will depend on for how long the disruption lasts.