V S DateyWebsite – http://www.dateyvs.com

Cenvat Credit

Welcome

My Introduction

V S Datey (Age 69), B Tech (Hons), FCS, FCMA

Worked as Finance Manager and Secretary in leading listed companies during 1965-1993

Writing books on indirect taxes and corporate laws and consultancy in indirect taxes since 1994

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 110 165 200

Tax credit System under Vat  Transaction without

VATTransaction With

VAT

Details A B A BPurchas

es- 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

Xerox not permitted. Endorsed Invoice/Bill of Entry permissible

Defect in document – Permission of AC/DC required to avail Cenvat Credit

Inputs for manufacturer

All goods used in factory by manufacturer having some relation with manufacture

Accessories and warranty spares supplied along with main final product

Power generation for captive consumption

Goods for providing output service

Inputs for service provider

Definition restrictedOnly inputs used for providing taxable

services eligibleConsumable eligibleIf 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)

Goods (and services) used for civil construction not eligible except when used for construction itself

Canteen food (and services), goods for personal not eligible - hand gloves – Is it ‘personal use or consumption’ of employee?

Goods having no relation with manufacture – As per CBE&C circular, even office furniture and stationery is eligible as input

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 (w.e.f. 1-3-2011) [so far, such reversal was required only if inputs were completely written off]

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

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

Inclusive part of Input Service

includes services used in relation to –

modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing,

(Continued)

Input Service (Contiued)

recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal (The words ‘activities relating to business such as’ removed in new definition)

Includes

If the word “include/s “ is used it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787.

In relation to

The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction

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

Credit on receipt of Invoice

In respect of invoices of service tax, on or after 1-4-2011, 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 as amended w.e.f. 1-4-2011]

In respect of invoices upto 31-3-2011, earlier provision continues

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

Payment of ‘amount’ increased to 6% in case of exempted services w.e.f. 1-4-2012

4 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 [The ‘amount’ payable was 5% 31-3-2012]. (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.

Exempted Services w.e.f. 1-4-2011

“Exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act and taxable services 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. Explanation – For removal of doubts, it is hereby clarified that ‘exempted services’ includes trading [Words in italics inserted w.e.f. 1-4-2011]

Exempted goods w.e.f. 1-4-2011

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 is availed [The words in italics have been inserted w.e.f. 1-4-2011].

 

Provision in case of traded goods

Difference between sale price and cost of goods sold is to be treated as value of exempted service

Good and sensible provision – should apply to past also

Exemptions subject to condition of non-availment of Cenvat Credit

Rule 6(3D) (inserted w.e.f. 1-4-2011) 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 33%, ‘amount’ of 6% will be on balance 67%.

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 vale 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 servicesSupplies to SEZ, EOUGoods 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.

Input Service Distributor – Rule 7

HO or Branch or Depot can pass on credit to factories.

They have to register, file returns etc.Monthly InvoiceNo credit where input service exclusively

for exempted goods or exempted serviceDistribution 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 challanReturn within 180 days.Dutiability of scrap at job worker’s place

Thanks

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