Basic purpose of VAT is to avoid cascading effect in the payment of taxes to the government. Its main advantage can be found as fall in the payment of taxes by the ultimate consumer.
CENVAT also comes in the same format but is structured in a different format.
CENVAT scheme allows credit of excise duty paid on inputs goods, capital goods and service tax paid on input services. This credit can be utilised for payment of excise duty on dutiable final products and service tax on taxable output services.
Such facility is available under a condition that credit can be availed only when manufacture takes place or any service which is taxable is provided.
Thus it works in the same way of VAT but here Input and Output remains as Excise duty paid and service tax paid.
Conditions imposed to consider tax paid as Input
Ø Credit of service tax on input services is available only after payment is made of bill including service tax to service provider for service.
Service tax paid at Head Office, Regional/Branch office can be utilised through mechanism of ‘Input Service Distributor’. They should be registered and pass credit through invoice.
Ø Only capital goods as defined in Rule 2(a) of CENVAT Credit Rules are eligible for CENVAT Credit. This definition is quite different from ‘capital goods’ as understood in conventional accounting or under income tax. Capital goods should be used in the factory of manufacturer or for provision of output service.
Capital goods should be used in factory. These can be sent outside for job work but should be brought back within 180 days except moulds, dies, jigs and fixtures.
Ø Capital goods if used for production of Exempted goods, CENVAT credit cannot be availed.
Ø If capital goods are used partially for exempted goods, then complete CENVAT credit can be utilised. Capital goods obtained on hire purchase/lease / loan are eligible.
Availment of CENVAT credit
Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the Capital Goods. In respect of inputs / capital goods procured from EOU unit, CENVAT credit is available equal to CVD and special CVD paid and education cess and SAH education cess w.e.f. 7-9-2009.
Ø The credit in this pool can be utilised for payment of any excide duty on excisable final product and service tax on taxable output service. The credit can also be used for payment of certain ‘amounts’.
Ø Credit can be utilised only of inputs and input services received upto end of the month
CENVAT credit is available only if final product is dutiable or service tax is payable on output service.
Problem in utilisation of credit arises if assesse is producing both exempted as well as taxable goods or both exempted as well as taxable services. In such a case assesse has 3 options.
Assesse can maintain separate records for the exempted as well as taxable goods or services.
If the assesse is using the same goods/services for producing exempted as well as taxable and also want to avail input credit, then assesse is required to pay 5% ‘amount’ on exempted final product or 6% ‘amount’ on exempt output services.
Pay amount proportionate to credit on exempted final product/output service
Option once availed cannot be changed in the financial year
Waste is final product for excise purposes and duty is payable as if final product is being cleared. This applies only if waste is ‘produced’ or ‘manufactured’ and is excisable goods, if waste is mentioned in Central Excise tariff.
Records and Returns:
Ø Manufacturer/service provider is required to maintain records of inputs and capital goods, records of credit received and utilised.
Ø Returns of details of CENVAT credit availed, Principal Inputs and utilization of Principal Inputs in forms ER-1 to ER-7 is to be submitted.
Ø Revised return of CENVAT credit can be submitted within 60 days
Ø SSI Industries have to follow separate set of provisions for the same.
Ø Merchant exporter can claim refund of specified input services used while exporting final product
Ø CENVAT can be transferred if any amalgamation has taken place.
Ø Penalty can be imposed for wrongfully taking or utilizing CENVAT credit