Transitional Credit Under GST: Key Issues and Updates

When the Goods and Services Tax (GST) was introduced in India on July 1, 2017, it marked a significant overhaul of the country’s indirect tax regime. It subsumed a range of existing central and state taxes such as VAT, service tax, excise duty, and others. One of the most debated and complex aspects of this transition was the transitional credit under GST. This provision allowed businesses to carry forward eligible input tax credits from the old tax system to the new GST regime, ensuring a seamless shift.

However, the process of claiming transitional credit under GST has not been without its complications. From procedural lapses and technical glitches to litigation and government clarifications, this aspect of GST has seen substantial developments over the years.

In this blog, we’ll delve into what transitional credit under GST entails, key issues faced by taxpayers, recent legal updates, and what businesses need to watch out for in 2025 and beyond.

What is Transitional Credit Under GST?

Transitional credit under GST refers to the input tax credit (ITC) that a taxpayer could carry forward from the pre-GST regime into the GST framework. This included credit on:

• Inputs held in stock

• Semi-finished goods

• Finished goods

• Capital goods

• Unavailed credit on capital goods

• Eligible duties and taxes as per Section 140 of the CGST Act

To claim this transitional credit under GST, businesses had to file specific transition forms like TRAN-1 and TRAN-2 within prescribed timelines.

Importance of Transitional Credit Under GST

Transitional credit played a crucial role in:

• Preventing tax cascading

• Maintaining working capital liquidity

• Avoiding double taxation

• Supporting smooth implementation of GST

Without transitional credit under GST, many businesses would have faced increased tax burdens, leading to pricing adjustments and cash flow issues.

Common Issues with Transitional Credit Claims

Despite its significance, several issues cropped up with the implementation of transitional credit under GST:

1. Technical Glitches in Filing TRAN Forms

Many taxpayers faced challenges due to GST portal glitches, particularly while filing Form TRAN-1. Several users were unable to submit the form within the due dates, resulting in denial of credit.

2. Strict Deadlines

Initially, the deadline to file TRAN-1 was set for 90 days from the appointed date. Although extensions were granted, many businesses missed the opportunity due to lack of clarity and system errors.

3. Lack of Documentation

For availing transitional credit under GST, proper documentation and invoices were necessary. Businesses without adequate records found themselves ineligible, even though they had legitimate claims.

4. Disputes on Eligibility

Questions also arose on whether certain taxes like cesses (e.g., Krishi Kalyan Cess) were eligible for transitional credit. The ambiguity led to denial of credit in several cases.

5. Litigation and Notices

The denial or partial acceptance of transitional credit under GST prompted multiple litigations. Several taxpayers received notices questioning their claims, often resulting in extended legal battles.

Key Legal Updates and Supreme Court Rulings

Recognizing the widespread issues faced by taxpayers, the judiciary stepped in to provide relief.

1. Delhi High Court Ruling (Brand Equity Treaties Case)

In 2020, the Delhi High Court held that the timeline to file TRAN-1 is directory, not mandatory, allowing taxpayers to file or revise the form even beyond the due date, provided the claim is genuine.

2. Supreme Court Intervention

In July 2022, the Supreme Court ordered a one-time opportunity for all taxpayers to file or revise TRAN-1/TRAN-2 forms. This opened a crucial window from September 1 to October 31, 2022, to rectify past errors and reclaim transitional credit under GST.

3. CBIC Clarifications

The Central Board of Indirect Taxes and Customs (CBIC) also issued multiple circulars providing clarity on eligibility and procedural aspects, helping streamline the process further.

Latest Updates on Transitional Credit Under GST

As of 2025, the status of transitional credit under GST remains relevant due to ongoing litigations, scrutiny of claims, and audit assessments.

Recent Developments:

• Audit Scrutiny: Authorities are examining large transitional credit claims in recent GST audits. Businesses are advised to maintain supporting documentation rigorously.

• Data Reconciliation: Mismatch between TRAN-1 data and GSTR-3B filings is triggering compliance alerts.

• AI-Driven Assessments: The government is deploying AI tools to identify anomalies in ITC claims, including transitional credit under GST.

Best Practices for Businesses

To avoid future issues related to transitional credit under GST, businesses should consider the following best practices:

1. Maintain Documentation: Preserve pre-GST invoices, purchase records, and capital goods registers.

2. Reconcile Data: Regularly reconcile TRAN-1/TRAN-2 filings with accounting records and returns.

3. Legal Review: Periodically review pending litigation or disputed claims with tax professionals.

4. Respond to Notices Promptly: Ensure timely and complete responses to any queries raised by the GST department.

5. Stay Updated: Follow CBIC notifications and circulars for any policy changes or clarifications.

Conclusion

The transitional credit under GST was a critical bridge for taxpayers moving from the old tax structure to the new GST regime. While it was designed to ease the transition, technical, procedural, and legal challenges complicated the process for many.

However, with judicial intervention and government support, many taxpayers have found resolution. Even today, transitional credit under GST continues to impact audits, assessments, and litigation. Businesses must remain vigilant, maintain proper documentation, and seek expert advice to protect their claims and ensure compliance.

As we move deeper into a mature GST ecosystem, transitional credit may become a historical topic. But for now, its implications are still very much alive, especially during audits and reconciliations. Staying informed and compliant is the key to navigating this critical area successfully.