cenvat credit some issues
TRANSCRIPT
V S Datey
Cenvat Credit – Some Issues
Conventional Tax System
Detail A B C
Purchases - 110 165
Value Added 100 40 35
Sub-Total 100 150 200
Add Tax 10% 10 15 20
Total 110 165 220
Tax credit System under Vat
Transaction without VAT Transaction With VAT
Details A B A B
Purchases - 110 - 100
Value
Added 100 40 100 40
Subtotal 100 150 100 140
Add Tax 10 15 10 14
Total 110 165 110 154
Highlights
Instant Credit
One to one co-relation not required in
Vat/Cenvat
Credit of excise duty on inputs and capital
goods and service tax on input services.
The credit is inter-changeable, except that
credit of education cess and SAHE cess for
education cess and SAHE cess only
Utilisation of Cenvat Credit
All taxes and duties specified in rule 3(1)
of Cenvat Credit Rules form a „pool‟. This
credit can be utilised by manufacturer of
excisable goods or provider of taxable
service, for payment of any tax or duty
as specified in rule 3(4) of Cenvat Credit
Rules
One to one relation not required
Eligible duty paying documents
Original or Duplicate Invoice, Dealer‟s
Invoice, Bill of Entry, Supplementary
Invoice, Railway certificate
Xerox not permitted. Endorsed
Invoice/Bill of Entry permissible
Defect in document – Permission of
AC/DC required to avail Cenvat Credit
Duty paying document valid for 6
months
Duty paying document valid only for 6
months w.e.f. 1-9-2014
Provision applies to earlier invoices also
Problems – (a) Goods returned for re-
work (b) Invoices not passed due to
disputes (c) Demands for past periods
Provision can be challenged
Cenvat Credit on receipt of Invoice
Cenvat credit can be taken on receipt of invoice, but if
payment is not made to service provider within 3
months, credit is to be reversed [Rule 4(7) of Cenvat
Credit Rules]
Later when payment made, Cenvat can be taken
If partial payment, then only partial reversal
Provision applies when service provider is charging
only partial amount under reverse charge in his invoice
What if payment made after 6 months?
Not applicable to Cenvat credit of excise duty
Cenvat Credit in case of reverse charge
When 100% tax payable by service receiver, Cenvat
Credit can be taken after payment of service tax to
government, even if no payment made to service
provider
When partial reverse charge applies, service receiver
liable to pay his portion of service tax to Government,
even if no payment is made to service provider within
three months – even then he can take Cenvat credit
only after making payment to service provider - unfair
What if payment made to service provider after 6
months as GAR-7 challan will be more than 6 months
old
Inputs for manufacturer
All goods used in factory by
manufacturer having some relation with
manufacture are eligible
Accessories and warranty spares
supplied along with main final product
Power generation for captive
consumption
Inputs for service provider
Definition restricted
Only inputs used for providing taxable
services eligible
Consumable eligible
If property in inputs transferred to buyer
– not eligible for Cenvat
Ineligible Inputs
Goods on which 1%/2% excise duty is paid [proviso to
rule 3(i) nt eligilbe
Goods (and services) used for civil construction not
eligible except when used for construction itself
Canteen food (and services), goods for personal use
not eligible
Goods having no relation with manufacture not eligible
Reversal of Cenvat if inputs partially or fully
written off
Cenvat credit reversal is required even if
the inputs are written off fully or partially
in books of account
Not applicable when general provision
made in books of account
Finished goods write off – remission from
Commissioner – reversal of Cenvat
Capital Goods
Capital goods (machinery, plant, spare parts of
machinery, tools, dies, etc. ) as defined in rule 2(a),
used for manufacture of final product and/or used for
providing output taxable service will be available.
Capital goods should be used in the factory. Capital
goods used outside the factory for generation of
electricity for captive use within the factory eligible
50% credit is available in current year and balance in
subsequent financial year or years, except in case of
SSI
Assessee should not claim depreciation on duty
portion on which he has availed Cenvat credit
Capital Goods
Only those defined as capital goods eligible –
check chapter heads
Steel, cement for construction not eligible
Spare parts, components, tools covered under
the definition though normally not capitalised in
books of account
If not covered under capital goods, may be
eligible as input if has some relation with
manufacture
Motor vehicles Eligibility to
manufacturers – effective 1-4-2012
Cenvat Credit is allowable on motor vehicles (except
under heading Nos. 8702, 8702, 8704, 8711 and their
chassis) to manufacturers. The excluded chapter heads
are relating to motor vehicles for transport of 10 or more
persons (including driver), motor cars, station wagons,
tor vehicles for transport of goods and motor cycles.
In effect, Cenvat credit is available only in respect of
tractors, special purpose motor vehicles, work trucks,
bicycles, baby carriages and trailers and parts and
accessories of all motor vehicles to the manufacturers,
w.e.f. 1-4-2012.
Cenvat Credit of Motor Vehicles
to Service Providers
Cenvat credit of motor vehicles covered
under headings 8702, 8703, 8704 and
8711 and their chassis is available only
to specified service providers like
courier, renting or hire of motor vehicles,
transportation of passengers, motor
driving training schools, transportation of
inputs and capital goods used for
providing an output service
Removal of capital goods after
use
If capital goods are cleared after use as scrap
or second hand goods, an „amount‟ payable by
reducing the original Cenvat credit @ 2.5% per
quarter ( [rule 4(5A)] (Higher reduction in case
of computers)
If excise duty calculated on basis of
transaction value of the old capital goods is
higher, then „amount‟ equal to that duty
payable.
Ineligible Input Services
Rent-a-cab services, insurance of motor vehicles,
repair of motor vehicles not eligible, except where
motor vehicle is eligible as „capital goods‟
Architect and Construction services for building, civil
structure, laying of foundation or structures for capital
goods – except when used for construction itself
Canteen, club membership of employees, insurance of
employees, LTA of employees – not eligible
Services in inclusive part of definition
These relate to procurement, marketing,
administration, accounting, raising of
finance, human resources
All five „resources i.e. M‟ s – Men,
Material, Machines, Money and Minutes
covered
Except services specifically excluded, all
other services should get covered
Wasteful Expenditure as per department
for non-eligibility of Cenvat credit
Open society - Building for office or
factory is a waste
Employees, staff, should travel by public
bus or airplane. Motor vehicle, taxi is
luxury
Employee benefit is a luxury – employ
only casual labour
Zero rated and exempt transactions
Basic principle is that Cenvat credit
available only when tax payable on final
product or output services
In zero rated transaction, tax not payable
on final product, but Credit of input taxes
is available (e.g. exports)
In „exempted transaction‟, tax is not
payable on final product and input credit
is not available
Rule 6 of Cenvat Credit Rules
Rule 6 applies where both exempted
goods and taxable goods are
manufactured or exempted and taxable
services provided
Four Options are available to assessee
Four Options
(1) Maintain separate inventory and accounts
of receipt and use of inputs and input services
used for exempted goods/exempted output
services – Rule 6(2) of Cenvat Credit Rules
(2) Pay amount equal to 6% of value of
exempted goods (if he is „manufacturer‟) and
of value of exempted services (if he is service
provider) – Rule 6(3)(i) as amended w.e.f. 1-4-
2012 (Continued)
Four Options (Continued)
(3) Pay an „amount‟ equal to proportionate
Cenvat credit attributable to exempted final
product/ exempted output services, as
provided in rule 6(3A) – Rule 6(3)(ii) of Cenvat
Credit Rules
(4) Maintain separate accounts for inputs and
pay „amount‟ as determined under rule 6(3A)
in respect of input services - Rule 6(3)(iii) of
Cenvat Credit Rules as inserted w.e.f. 1-4-
2011.
Intimation to department in case of
proportional reversal
If assessee intends to opt for
proportionate reversal, he is required to
intimate department
What if intimation not given? Really only
a procedural lapse
Tribunal has held that reversal means
Cenvat credit was not taken
Rule 6(2) and 6(3)(ii) complementary or mutually
exclusive
Rule 6(2) – separate records – rule
6(3)(ii) – proportionate reversal
Can assessee follow rule 6(2) where
direct relation between input service and
output service available and follow rule
6(3)(ii) in other cases?
In my view - yes
Exempted Services
“Exempted service” means a - (1) taxable service
which is exempt from the whole of the service tax
leviable thereon; or (2) service, on which no service
tax is leviable under section 66B of the Finance Act; or
(3) taxable service whose part of value is exempted on
the condition that no credit of inputs and input
services, used for providing such taxable service, shall
be taken; - - but shall not include a service which is
exported in terms of rule 6A of the Service Tax Rules,
1994 [Rule 2(e) of Cenvat Credit Rules as inserted
w.e.f. 1-7-2012].
Exempted goods
As per Rule 2(d) of Cenvat Credit Rules,
'exempted goods' means goods which are
exempt from whole of duty of excise leviable
thereon and includes goods which are
chargeable to 'Nil' rate of duty and the goods
in respect of which the benefit of an exemption
under Notification No. 1/2011-CE dated 1st
March 2011 or entries at Sr Nos 67 and 128 of
Notification No. 12/2012-CE dated 17-3-2012
is availed
Provision in case of traded
goods
Difference between sale price and cost
of goods sold (gross margin) is to be
treated as value of exempted service
Good and sensible provision – should
apply to past also
Provision can apply to works contract
service also
Exemptions subject to condition of non-
availment of Cenvat Credit
Rule 6(3D) states that payment of
„amount‟ under rule 6(3) means Cenvat
credit not taken for purpose of an
exemption notification where exemption
is granted on condition that no Cenvat on
input and input services is availed
Good provision – even Tribunal had held
so earlier
Value for Services under abatement
scheme
Entire Value will be treated as value of
„exempted service‟ for rule 6
However, if 6% „amount‟ is payable, it
will be on amount on which service tax
not paid (e.g. if service tax paid on 40%,
„amount‟ of 6% will be on balance 60%)
Value of service for services under composition
Schemes for rule 6
In case of services covered under composition
scheme, „value‟ for applying rule 6 will be tax
amount divided by rate of service tax
applicable under general exemption. Present
rate is 12%
If gross amount Rs. 1,000, service tax paid Rs.
48. Then value of taxable service for rule 6
would be Rs. 400.
If service tax rate 10% then service tax would
be Rs 400 and value will be Rs 400.
Overriding Provisions
In respect of banking service, the Bank or
NBFC is required to pay „amount‟ equal to
50% of Cenvat Credit availed on inputs and
input services [Rule 6(3B) of Cenvat Credit
Rules as inserted w.e.f. 1-4-2011].
No reversal in case of zero rated
transactions
Export of goods and export of services
Supplies to SEZ, EOU
Goods supplied against international
competitive bidding, goods supplied to
UN organisations, foreign diplomats
Provision of services to SEZ (where
exemption is available)
Principle Behind Calculations
Take entire Cenvat credit of inputs and input
services used in exempted as well as taxable final
products and exempted as well as taxable services.
At the end of month, assessee should
calculate and reverse Cenvat credit
attributable to exempted final products and
exempted services on provisional basis
Rule
6(3A)(b)(i) Inputs used for exempted final products
Rule
6(3A)(b)(ii) Inputs used for exempted services (On
proportionate basis, based on ratio of
previous year)
Rule
6(3A)(b)(iii) Input services used for exempted final
products and exempted services (On
proportionate basis based on ratio of
previous year).
Total 1+2+3 = amount to be reversed every
month on provisional basis
Calculations at the end of the year
Assessee should calculate the ratios on
actual basis and make fresh calculations
and pay difference, if any, before 30th
June.
If it is found that he had paid excess
amount based on provisional ratio, he
can adjust the difference himself by
taking credit.
Rule 6 in composition scheme
Restaurant service – only 40% Cenvat
credit available
Works contract service – 25%, 40% and
70% schemes – difference between sale
price of goods and purchase price to be
treated as value of „exempted service‟
and then apply rule 6
Input Service Distributor – Rule 7
HO or Branch or Depot can pass on
credit to factories.
They have to register, file returns etc.
Monthly Invoice
No credit where input service exclusively
for exempted goods or exempted service
Distribution on turnover basis of previous
month
Refund of Cenvat Credit – Rule 5
Refund of Cenvat credit on proportionate
basis of exports of goods and services
General Experience is bad – some
excuse is found to reject the refund claim
Removal for job work
Own challan
Return within 180 days.
Dutiability of scrap at job worker‟s place