Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to be good.
Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee has strongly recommended ‘Goods and Service Tax’ (GST).
Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by proposing to make credit of service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.
General highlights of the scheme (except those related to integration of service tax and excise duty credit) are as follows :
Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input services.
Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c) Paints, packing materials, fuel etc. used for any purpose. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel.
Input may be used directly or indirectly - The input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the final product.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise duty paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
No input credit if final product/output service exempt from duty/ service tax - No credit is available if final product is exempt from duty or final service is exempt from service tax. If a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty. Similarly, in case of service provider, some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% of price of exempted goods. - - As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
In case of exempt services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
Credit on basis of specified documents - Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Credit available instantly - Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory is received. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year. In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be established.
Integration of Excise duty and service tax credit - The highlights of scheme of integration are as follows –
Wide definition of ‘input service’ – A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final product/provision of output services. This would include even services which are received prior to commencement of manufacture/provision of output services. Even input services relating to setting up a factory will be eligible.
In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to manufacture/provision of output services but are related to the sale of manufactured goods/provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Full credit of tax paid on input services - Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would be allowed, even if these are partly used in exempted final product/output services.
Credit of duty paid on capital goods – Capital goods used for manufacture of final product and/or used for providing output taxable service will be available. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended.
Restriction on credit of capital goods - The restriction of 50% on credit on capital goods would continue for manufacturers as well as service providers, i.e. in case of capital goods, 50% credit will be available in first year and balance 50% in subsequent year/s. It may be noted that in case of some service providers, motor vehicle has been defined as ‘capital goods’.
credit of goods as inputs used by service providers – Goods used for provision of output services will be treated as inputs even in respect of service provider. A service provider will be entitled to credit of excise duty paid on raw materials/consumables used by him while providing output service. It may be noted that as per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods and materials used by him for providing output services. This notification makes it clear that this exemption is not available if Cenvat credit of duty paid on inputs is taken. If such credit is taken, it should be reversed.