Article on Cenvat Credit Rules, 2004 – Recent Changes
The CENVAT Credit Rules, 2004, were introduced with effect from 10.9.2004, provided for availment of the credit of the Service Tax paid on the input services/Central Excise duties paid on inputs/capital goods/Additional Customs duty leviable under section 3 of the Customs Tariff Act, equivalent to the duties of excise. Such credit amount can be utilized towards payment of Service Tax by an assessee on their output services. Cenvat Credit is already a highly disputable and the changes made through budget 2011-12 added fuel to fire. In this article, I have tried to summarize the changes made through budget 2011-12.
Changes in Cenvat Credit Rules, 2004
A) Changes in the definition of Inputs under Rule 2(k) of CCR, 2004
The definition of input has been revised and list of eligible and ineligible inputs have been specified which is summarized below. Eligible input forms the inclusion part of the definition whereas ineligible forms the exclusion part.
All goods used in the factory by the manufacturer of the final product Light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol Any including accessories if its value is included in providing free warranty
Any goods used for the construction of a building or a civil structure or laying of foundation or making of structure for support of capital goods, except persons engaged in providing Port services, Other Port Services, Airport Services, Commercial or Industrial Construction, Construction of Residential Complex and Works Contract Service
Goods used for generation of electricity or steam for captive use
All goods used for providing any output service
Capital goods except when used as parts and components in manufacture of final product
Goods for personal use or consumption
Earlier, there was a specific requirement that the goods to be treated as inputs should be used in or in relation to the manufacture of final products whether directly or indirectly. The said condition has been replaced with the condition of goods being used in the factory. Thus with this amendment all those goods which is used by the manufacturer of the final product in the factory shall be treated as inputs under Rule 2(k)(i) of the CCR,2004.
B) Changes in the definition of Input Service under Rule 2(l) of CCR, 2004
Following changes have been made in the definition of input service:-
1) The phrase “activities related to business” has been deleted from the inclusive part of the definition. Though the word activities relating to business has been deleted Cenvat credit cannot be denied on services which are not specified in list of eligible service as the list of services specified are illustrative and not exhaustive. Hence, service tax on any service for example telecommunication service used in providing output service will be available as credit.
2) Certain specified services (Architect, Port, Other Port, Airport, Commercial or Industrial Construction, Construction of Residential Complex & Works Contract services)are not treated as input services if they are used for
Construction of building or civil structure or part thereof or,
Laying of foundation or making of structures for support of capital goods.
3) Certain specified services (General insurance, Rent-a-cab, Authorised Service Station, Supply of Tangible Goods service) are not to be treated as inputservices if they relate to motor vehicle. However, the said exclusion shall not be
applicable if the said motor vehicle is used for providing taxable service & the
same is treated as capital goods under rule 2(a) of CCR ’04.
This can be better understood with the following examples:
Example 1: X is a manufacturer who purchased a vehicle for transport of goods from the factory to the place of trader. He got a general insurance of his vehicle. Whether credit of service tax on insurance charges will be available to X?
In the given case, credit of motor vehicle as capital goods is not available to as capital goods. Hence, credit of service tax paid on insurance charges will be not available to X as Cenvat Credit on motor vehicle is not available to X.
Example 2: Y is engaged in providing Cargo Handling Service. He purchased a motor vehicle and got a general insurance of that vehicle. Whether credit of service tax paid on insurance charges will be available to Y?
Solution:In the given case, credit of motor vehicle as capital goods is available to Y as it is used in providing Cargo Handling service. Hence, credit of service tax paid on insurance charges will be available to Y as it is incurred on motor vehicle which is eligible for Cenvat Credit as capital goods.
4) Services of business exhibition and legal service has been included in the inclusive part of the definition
5) Service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has been given in the definition.
C) Changes in the definition of Capital goods under Rule 2(a) of CCR, 2004
The definition of capital goods has been amended to include goods which are used outside the factory for generation of electricity for captive use within the factory. Thus credit on thesaid items shall also be available to the extent of 50% of the duty paid on such goods in thesame financial year.
D) Exempted Services
The definition of“Exempted services”has been amended to include services on which no service tax is leviable under section 66 of the 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. Exempted Service also includes trading.(The method of calculation is shown in Rule 6(3A))
E) Exempted Goods
The definition of “Exempted goods” has been amended to include excisable goods which are chargeable to “Nil” rate of duty [and goods in respect of which the benefit of an exemption under notification No. 1/2011-CE, dated the 1st March, 2011 is availed.
F) Changes in Rule 4 of CCR,2004-Conditions for allowing Cenvat Credit)
Following changes have been made in Rule 4 of the Cenvat Credit Rules due to introduction of Point of Taxation Rules, 2011:-
® For invoice issued after POT (01.04.2011 or 01.07.2011 as the case may be) Cenvat Credit can be availed on billing basis provided payment will be made within 3 months from the date of invoice. (not from date of receipt of invoice). If credit is taken on accrual and payment is not made within 3 months then credit has to be reversed along with interest.
Example:If X ltd took credit on the basis of invoice issued by A Ltd dated 15.05.2011 of Rs ` 50000 in the month of May. However, the payment was made by X ltd to A ltd on 20.09.2011. What will be the treatment as per Cenvat Credit Rules, 2004?
Cenvat Credit can be taken on billing basis only if payment has been made within 3 months from the date of invoice. In the given issue the payment has been made after the lapse of 3 month. Hence, at the end of 3 month i.e 14.08.2011 credit availed earlier has to be reversed along with interest. Interest shall be calculated from 05.06.2011 to 05.09.2011 on ` 50000/- @18%. Which shall be 2250/-. However, on making payment cenvat credit can be taken i.e on 20.09.2011 cenvat credit can be availed.
® For invoice issued prior to POT (01.04.2011 or 01.07.2011 as the case may be) credit shall be availed on payment
® In cases where receiver has the liability to pay service tax credit will be available on payment
® If payment or part made towards input service on which credit is claimed is refunded then the manufacturer or service provider has to pay the amount of credit taken on such amount refunded.
G) Changes in Rule 6 of CCR,2004- Obligation of a manufacturer or producer of final products and a provider of taxable service
A large number of changes have been made in Rule 6 for providing the manner in which the Cenvat Credit will be availed by the manufacturer of exempted and
dutiable goods or the provider of taxable and exempted services.
1) Rule 6(5) which provided 17 services in respect of which CENVAT Credit is fully allowed even if these are also used for providing exempted services, has been deleted w.e.f. 01.04.2011. This has been done due to introduction of proportionate credit scheme.
2) The amount payable under Rule 6(3)(i) in respect of services have been reduced from 6% to 5 %.
Remarks: How will be the amount under Rule 6(3)(i) be determined in case person is engaged in providing service on which abatement (for example 60% abatement is granted under Mandap keeper services) is being claimed?
In cases where person is providing service in which abatement is being claimed amount to be paid shall be 5% of abatement. In the given example amount to be paid shall be 5% of 60 i.e 3%.
3) Option to maintain separate accounts only in respect of inputs has been given and proportionate cenvat credit shall be taken on input service as per formula given in Rule 6(3A).
4) Banking or financial companies are required to reverse 50 per cent of CENVAT credit availed in a month
5) Insurance companies are required to reverse 20 per cent of CENVAT credit availed in a month.
6) No reversal of CENVAT credit in respect of services rendered to SEZ units and developers
7) Trading is now an exempt service.
Method of determination of value of exempted service in case of trading
Rule 6(3A) provides the method for determination of value of exempt service in case of trading. Value of Trading Services = Selling Price less COGS as determined by GAAP or 10% of COGS whichever is higher.
The Cenvat Credit Rules-2004 has been amended with a view to remove long lasting ambiguities in the system. However, this may further aggravate the issues between department and service tax assesses. However, it is a well settled fact that benefit of Cenvat Credit cannot be denied for procedural lapses. The full benefit and purpose of introduction of Cenvat Credit will not be availed unless and until GST is implemented. At present it seems highly unlikely that GST will be implemented by 01.04.2011. Let’s hope that GST may be introduced so that the benefit of GST is available to individuals and companies and helps in the overall development of our country.
Nirav Kumar Worah
Email – nirav.worah-at-gmail.com