02/20/08 FICCI 1

Service Tax Service Tax CENVAT CREDIT CENVAT CREDIT

02/20/08 FICCI 2

Step Towards Integration

• In the budget 2004-2005 the idea to extend credit of service tax and excise duty across goods and services was mooted.

• The CENVAT Credit Rules, 2004 came into force from 10-9-2004, and have replaced the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002.

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What is available as credit• CENVAT credit of excise duty (including

additional excise duty etc.) and the service tax and the Education Cess on taxable services and excisable goods, which is paid on-– Any input or capital goods received in the

premises of the provider of output service on or after the 10th day of September, 2004, and

– Any input service received by the provider of output services on or after the 10th day of September, 2004,

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Components of eligible duty & Tax • The duty of excise specified in the First and the

Second Schedule to the Excise Tariff Act, leviable under the Excise Act,

• The additional duty of excise leviable under section 3 of both (i)the additional Duties of Excise (Textile and Textile Articles) Act, 1957 and (ii) additional Duties of Excise (Goods of Special Importance) Act, 1957. Also the additional duty of excise leviable under section 157 of the Finance Act, 2003.

• The National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001,

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Components of eligible duty & Tax• The Education Cess on excisable goods leviable

under section 91 read with section 93 of the Finance (No. 2) Act, 2004,

• The additional duty leviable under the Customs Tariff Act,

• The service tax leviable under section 66 of the Finance Act,

• The Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004,

• the additional duty of excise leviable under section 85 of the Finance Act, 2005

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When credit is available

• The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the premises of the provider of output services

Components of eligible duty & Tax

• An importer who pays CVD (countervailing Duty) by a debit in DEPB pass book may not be eligible to credit in the absence of express provisions.

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Payment of input service is pre-condition

• The credit is allowed only after the payment of service tax as indicated in invoice. [sub-rule (7) of Rule 4].

• There is no express provision for partial allowance based on part payment or settlement for a lower value.

• Contrarily liability of tax on output service arises even on receipt of part payment.

• A logical presumption is that credit should be ava

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What is not input• Light diesel oil, HS diesel, petrol whether used in

relation to manufacture of goods or for provision of service, irrespective whether used directly or indirectly and whether contained in the final product or not.

• Also included in the above list are lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production,

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What is input and input service

• Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer

• “Input service” means any service,-– used by a provider of taxable service for providing an

output service, or– used by the manufacturer, whether directly or

indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal,

• A co-relation of inputs to output is thus a must.

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What is input and input service• Services used in relation to setting up,

modernization, 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, activities relating to business such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal are also input services. [clause (1) of rule 2]

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Importance of place of removal• Sec.4(3)(c ) of the Central Excise Act stipulates as

under:"place of removal" means-i. a factory or any other place or premises of

production or manufacture of the excisable goods; ii. warehouse or any other place or premises wherein

the excisable goods have been permitted to be deposited without payment of duty,

iii.a depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance form the factory.

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Impractical Situations • Question may arise as to allowability of CENVAT

credit on tax paid on transportation used after place of removal. What is the logic of such disallowance. Shall it extend to transportation incurred on after sales maintenance and free replacements.

• Condition relating to receipt of goods in the premises for availing cenvat credit.– CENVAT Credit for the excise duty paid on any input or

capital goods will be allowed as credit only if such input or capital goods are received in premises of output services provider

– in case of a tour operator, he does not bring the motor vehicle in its premises but are used for the rendering of output service

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Credit of education cess only against education cess

• The credit of the Education Cess on excisable goods and the Education Cess on taxable services can be utilized either for payment of the Education Cess on excisable goods or for the payment of the Education Cess on taxable services [proviso to clause (b) of sub-rule (7) of Rule 3]

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Utilization / Application of credit• When to utilise

– The CENVAT credit may be utilized for payment of service tax on any output service, but the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be [sub-rule (4) of Rule 3].

• A question may arise, whether CENVAT credit can be used to pay interest and penalty. (note2 of ST3).

• Refund of unused credit shall not be allowable under any circumstances. (Rule 4(2))

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Utilization / Application of credit

• Reversal / utilization of Credit– The CENVAT credit may be utilized for

payment of-– a)An amount equal to CENVAT credit taken

on inputs if such inputs are removed as such or after being partially processed’ or

– b)an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such’ or

– service tax on any output service:

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Utilization / Application of credit• Availing of credit is subsequent to recording of

credit. Recording and reversing amounts to not availing the credit and no penalty can be invoked.

• credit can be denied to an assesse under the rule only on two grounds, firstly for having not used the inputs in the manufacture of goods and secondly for having removed the inputs as such. The credit cannot be denied to the assessee for having failed to utilize the inputs for a long time or for having written of the value of the inputs in the books. (CCE, Indore v. M/s Kinetic motors Co. Ltd.)

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Transition from exemption to taxability• In case where a service which ceases to be an

exempted service, the provider of the output service shall be allowed to take CENVAT credit of the duty paid on the inputs (not input services) received on and after the 10th day of September, 2004 and lying in stock on the date on which any service ceases to be an exempted service and used for providing such service

• This benefit is apparently not available on transition to taxability on crossing of 4 lac barrier.

• The credit in respect of input services availed and lying as part of stock & WIP should be available on logical grounds in the absence of specific denial.

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Transition from old to new rules• As per Rule 11, the service tax and excise duty

credit lying un-availed under the Service tax credit rules, 2002 or CENVAT credit rules 2002 shall be allowed to be utilised under the CENVAT credit rules, 2004.

• As per Rule 11, the amount of credit of input or input services as comprised in the value of closing stock of Raw material, WIP and finished goods on the date of transition from taxability to exemption shall have to be paid back. This law is applicable only for claiming value / qty based exemption during a fy. year.

Transition from Taxability to exemption

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Credit for inputs used in exempt services • cenvat credit is not available in respect of inputs

contained in scrap (exempted goods). • Exceptions to this rule are:

– “the credit utilized when final products is dutiable, can not be reversed if subsequently the exemption is withdrawn.” Commissioner of Central Excise Rajkot Vs.

ASHOK Iron & Steel Fabricators, 2002 (140) ELT 277 • Separate books of accounts be kept where both taxable

and non-taxable services are being rendered. Record of receipt, consumption and inventory should be maintained.

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Credit on common inputs for taxable and exempt services

• In the absence of separate record credit availability shall be restricted to 20% of output tax.

• Unused balance of credit can however be carried forward indefinitely.

• Where credit available is less than 20% of output liability the whole credit should be allowed.

• W.E.F. 16/05/05 explanation III has been added to rule 6 (3) to restrict availability of credit where input is incurred exclusively in respect of exempted goods/ services.

• A question may arise, can a trader, rendering taxable services in addition to trading, adopt the 20% formula in the light of the fact that trading is no service at all.

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Consignment makes business sense• Trading is not a taxable service. It is rather not a service.• Trading as agent is covered under Business Aux.

Services.• Agent can claim tax input on advertising, market

research etc. but trader can not.• This is over and above the VAT free stock transfer

advantage.ISSUES

• A question may arise as to availability of input service tax credit to a share broker who in addition to trading on behalf of customers and sub-brokers trades on his own.

• Similar issue may arise in case of company engaged in wholly taxable activity but extends interest bearing loans from it’s surplus funds.

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Option of mixed system of credit• Assessee providing many services• For some services, separate input record is

maintained• For others common inputs are used• Law does not prohibit use of different method of

claiming credit in respect of different services• Law itself provides for full credit for 16 input

services unless they are inputs, exclusive to exempt services. Services of the like Consulting Engineer, Architect, IPR, Construction, Banking, Real Estate, Security, Management consultancy are included here.

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Abetments and exemptions

• Notif. 1/2006 provides that a service provider who claims an abetment shall not be eligible to input credit.

• Where a construction job is sub-contracted the contractor will not be able to claim credit of input service tax charged on the bill of the subcontractor simultaneous to his claim for abetment.

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Matching of input to output service• There is no specific requirement of matching

each input service to corresponding output service for claiming the credit.

Credit for expenditure on Mobile Phone

Mobile phone expenditure was hitherto not Mobile phone expenditure was hitherto not allowed under the Service tax credit rules,2002. allowed under the Service tax credit rules,2002. Only expenditure in respect of phones installed at Only expenditure in respect of phones installed at the premises from where the service is provided the premises from where the service is provided was allowed. There is no such restriction with the was allowed. There is no such restriction with the Cenvat Credit Rules, 2004.Cenvat Credit Rules, 2004.

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Credit on Capital Goods• Capital goods are: • i. all goods falling under chapter 82, 84, 85, 90,

heading no. 68.02 and sub-heading no. 6801.10 of the first schedule to the excise tariff act (these chapters include defined items of machinery, tools, optical, photographic, medical instruments, abrasive material etc.)

• (ii) pollution control equipment, (iii) components spares and accessories of above specified goods, (iv) moulds and dies, jigs and fixtures,(v) refractory and refractory materials,(vi) tubes and pipes and fittings thereof, and (vii) storage tank,

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Credit on CG -Restrictions• Capital goods used in factory (and not in

office) are eligible to credit.• In case of output service provider also the

credit is available. The restriction of use in office is apparently not there.

• For motor vehicles the credit is available only to couriers, tour operators, cargo handling agency, goods transport agency, outdoor caterer, pandal & shamiana contractor & rent a cab operator.

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Credit on CG - procedure • Credit is available in two parts of 50% each. One in

the year of acquisition and the other in the subsequent year. There is no condition of put to use or installation.

• capital goods acquired on lease, hire purchase or loan are equally eligible to credit.

• On clearance of capital goods in the first year itself the entire credit shall be available.

• Depreciation on duty is not allowed. Dealer to take only one benefit.

• Credit is not denied if CG are sent for job work and received with in 180 days. Beyond this period the credit will have to be reversed and reclaimed once the goods are received back.

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Credit reversal - removal of CG

• On removal (except for providing the output service) CENVAT credit as availed on such goods shall have to be reversed / paid.

• Removal shall be under the cover of an invoice. • No reversal if removal is as scrap / waste.• However duty as applicable on scrap / waste

shall be chargeable by manufacturer. This would not apply to service provider.

• CENVAT credit shall not be available on capital goods used exclusively for exempted goods / services

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Refund of CENVAT credit• Exports not only entail transfer of goods and services

without charging any duty or service tax they also entitle the exporter to claim credit for duty and service tax paid on inputs and input services against his other taxable activity. Where adjustment is not possible, law provides for refund.

• Cenvat Credit Rules provide for refund in case of exporting manufacturers. “Export of service rules” provide for refund in case of services export.

• Refund of credit shall be not be allowed where the exporter avails drawback or rebate of duty under the relevant rules.

• A question may arise on availability of credit to merchant exporters.

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Input service distributor • Where several manufacturing units or service

providing units, scattered geographically, work under an umbrella of a (say) head office and the head office either incurs common expenses or procures inputs centrally or even clears all bills for supplies or services centrally, the units will be unable to claim the cenvat credit on such payments. There may situations where services or goods are received by units or where expenses like marketing, management consultancy or advertisement are incurred centrally.

• To circumvent such a situation the distribution rules have been introduced for the first time.

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Conditions for distribution of Credit

• Credit can not be distributed in excess of the amount of service tax paid by the distributor,

• Credit attributable exclusively to exempted goods or services shall not be distributed.

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Registration of Distributor

• input service distributor shall have to issue an invoice or a challan,signed & serially numbered and containing in addition to the amount being distributed, the particulars of the service provider, credit distributor and the recipient of the credit. Such provisions did not exist in law prior to 16/06/05.

Procedure for distribution

• The distributor shall need to seek registration and shall be required to file regular returns.

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Maintenance of Records • the burden of proof regarding the admissibility of

the CENVAT credit whether on inputs, input services or on capital goods, shall lie upon the manufacturer or provider of output service taking such credit. [sub-rule (5) of rule 9].

• The manufacturer of final products or the provider of output service shall maintain proper records for the receipt, disposal, consumption and inventory of the input and capital goods in which the relevant information regarding the value, duty paid, CENVAT credit taken and utilized, the person from whom the input or capital goods have been procured etc. is recorded. Thus no specific record is prescribed.

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Documents entitling credit• Invoice issued by either the manufacturer or importer or

from a registered depot of the importer or his consignment agent.

• Invoice issued by a first stage or a second stage dealer.• A supplementary invoice, issued by a manufacturer or

importer of inputs or capital goods. • A bill of entry. • A certificate issued by an appraiser of customs in respect of

goods imported through a Foreign Post Office. • an invoice, bill or challan issued by an input services

distributor under rule 4A of the Services Tax Rules, 1994. [sub-rule (1) of rule 9]

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Documents entitling credit

• A challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub- rule (1) of rule (2) of the Service Tax Rules, 1994,

• The above clause has been amended, w.e.f. 16-6-2005 to provide that in case of input service of goods transport service is utilized then CENVAT Credit can be availed on the strength on the TR-6 Challan. This is trade facilitation measure taken by the Government as several representations were made to the Government in this regard.

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Contents of an Invoice• The invoice / Challan shall be signed, serially

numbered and shall contain:- – The name, address and the registration number of the

issuer,– The name and address of the person receiving taxable

service – Description, classification and value of taxable service

provided or to be provided; and – The service tax payable thereon.

• In the absence of some of the above particulars the credit may not be denied if the authorities are satisfied that the tax under review has been paid and the input credit is being legitimately claimed.

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Payment of tax to ensure before taking CENVAT Credit

• The output service provider or the input service distributor taking CENVAT credit shall take reasonable steps to ensure that tax on such goods / services has been duly paid by his input / service provider.

• To satisfy oneself about the identity and address of the person issuing invoice is such a reasonable step. To keep a copy of certificate of registration of such person is also such a step.

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THANKS