Before you cancel your GST registration: GST Impact

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Before you cancel your GST registration: GST Impact 

The turnover limit for registration under GST has been raised significantly. There are lot of businessmen who were covered by the GST provision when the GST limit was Rs. 20 Lakh. Now, after the limit is raised to Rs. 40 Lakh, few are preferring to cancel the GST registration. The GST cancellation is preferred as the market for the FY 2020-21 has also been disrupted by Covid and regular lockdown. The GST registration cancellation is likely to relieve them from unnecessary compliance burden of return filing as well. But, before registration is cancelled, taxpayers need to know the GST implications as well.

Person canceling GST registration may be having stocks as well as even capital goods on the date of cancellation on which such person must have availed input tax credit (ITC) under GST. Further, it may be possible that the person may have opted for Composition scheme & may not have availed the ITC directly as such.

 

It is worthwhile to read Section 29 of the CGST Act, 2017 which is related with the provisions of cancellation of registration. Sec. 29(5) of the said Act dealing with the current issue provides as under:

“Sec. 29(5) Every registered person whose registration is cancelled shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher, calculated in such manner as may be prescribed :

Provided that in case of capital goods or plant and machinery, the taxable person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery, reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery under section 15, whichever is higher.”

In short, section 29 clearly stipulated that the registered person whose registration is cancelled shall pay any amount by

 

1.  either debiting the cash ledger or

2. the credit ledger.

 

Amount to be paid is prescribed is as under:

(i) credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or

(ii) the output tax payable on such goods whichever is higher, calculated in such manner as may be prescribed

 

In case of reversal of capital goods, the amount of ITC to be reversed has been prescribed to be after allowing for the period of use. Rule 44(1) of the CGST Rules, 2017 pursuant to Sec. 29(5) provides that the pro-rata ITC in case of capital goods is to be calculated assuming the useful life of capital goods to be 5 years. In short, if on the date of cancellation, the given capital goods has been used for 4 years, the ITC to be considered for reversal shall be on pro-rata basis for balance 1 years of the remaining useful life only.  What is prescribed is logical also as the capital goods are capable for use over a period of time and hence ITC attributable to such period before the date of cancellation should not be reversed.

Amount that needs to be reversed has been prescribed to be higher of

1.      credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or

2.       the output tax payable on such goods.

 

In short, GST registration cancellations have a tax implication which taxpayers must note before cancelling for it.

 

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