Cenvat Credit Rules
Amendment in Finance Act 2011
- The definition of ‘exempted goods’ has been amended and now it includes even those goods on which the option has been exercised by the manufacturer to pay the duty at concessional rate of 1% on 130 specified entries as per notification no.1/2011-CE.
- The provisions have also been amended to specify that the Cenvat credit shall not be utilised for payment of excise duty at concessional rate of duty of 1% under notification no.1/2011. This change is effective from 1st March 2011.
- The definition of ‘exempted services’ has also been amended. Now the definition includes even those services in respect of which the service provider has opted for exemption on part of the value with a condition that no Cenvat credit of input or input services. For example, if the service provider engaged in providing the service of ‘construction of complex’ service claiming the abatement of 67% as per the service tax notification no.1/2006 without the Cenvat credit benefit and pays tax only on 33% value, then even such service would be construed as ‘exempted service’.
- The very important change in the definition has been brought in the definition of ‘exempted service’ by way of explanation in this budget. Now, the exempted service includes even ‘trading activity’.
- Issues on the said amendments
- The said manufacturer/service provider would have to follow Rule 6 of Cenvat Credit Rules, in order to restrict the credit with respect to credits pertaining to input and input services with respect to such exempted goods/ exempted service.
- Rise in administrative cost in maintaining separate books for input used in manufacture of taxable goods and exempted goods. (however no separate books could be maintained with respect to common input services, wherein the formula with proportionate credits needs to be adopted in arriving at the value of eligible input service credits
- Accountant needs to be trained, in identification of eligible input or input service credits.
- The definition of ‘input’ contained in rule 2(k) has been revised. The requirement that goods should be used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not has been removed. Henceforth, all goods used in the factory by the manufacturer of the final product, except those specified in the negative list and goods having no relationship whatsoever with the manufacture of final product, would qualify for treatment as inputs. In addition, any goods including accessories cleared along with the final product and goods used for providing free warranty have also been included in the definition of inputs. Similarly, goods used for generation of electricity or steam for captive use also constitute inputs. As for exclusions, 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 have been excluded. Another feature of the new definition is that goods used primarily for personal use or consumption of any employee including food articles etc. has been expressly excluded. Now the definition also does not include capital goods except when used as parts and components in manufacture of final products and also does not include the motor vehicles.
- Issues/Impact on the said amendments
- Employees using safety precaution uniforms, in order to protect themselves while discharging their duty of manufacturing activity, cenvat credits on such uniforms would be available.
- Goods such as storage racks used in stores, tables and chairs used in administrative department/ accounts department/ sofas chairs kept at receptions/ waiting rooms shall not be allowed as credits.
- Tools and equipments used for garden maintenance, tube lights, fans, exhaust fans fitted either at the manufacturing area or administrative areas shall not be allowed as input credits.
- Goods used as staff welfare measures, such as seasonal gifts to employees, complimentary gifts to clients during new year/ Dewali/ Christmas etc shall also be denied.
- Going the principles of Cost Accounting Standards- 4, in order to arrive at the value of the cost of the product such manufacturer would have to factor in the above said cost in its final price and excise duty have to be paid on such final price, when manufacturer is denied enjoying the input credits on above said items, would certainly impact the margins of the manufacturer, which could result in undue tax planning.
- Further such demarcation would certainly create a barrier for transforming and implementing GST.
- GDP growth of the economy would certainly take a back foot to an extend of such cascading, complemented with inflation.
- The definition of ’input service’ has also been rationalized to impart clarity. Now the input service definition excludes few services such as architect service, port service, air port service, other port services, commercial or industrial construction service, works contract service and construction of residential complex when they are used in construction of building or civil structure or even when used for laying foundation or making structure for support of capital goods. The definition also excludes services such as rent a cab service, general insurance service, authorised service station service and supply of tangible goods service unless they are used by service providers who have been allowed to take Cenvat credit of duty paid on capital goods. The definition also excludes services such as those provided in relation to outdoor catering, beauty treatment, health service, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefit extended to employees on vacation such as leave or home travel concession, when such services are used primarily for personal use or consumption of any employee.
- Issues on the said amendments
- As service industry predominantly depends on skill sets/ intellects of an individual’s, and majority of expenses incurred by such industry is towards welfare and benefit of human resource. Denial of the benefit the of cenvat credit on services like rent- a –cab, insurance, Sodexho pass, cafeteria, air ticket booking for LTC was completely illogical. As service industry consider human resource cost as its direct cost, and such costs are considered for the purpose of discharging service tax, therefore the margins would certainly be impacted. The decision behind denial of such credits was for the reason that the industry was enjoying double benefit in form of cenvat credit as well as income tax deduction towards the said expenses, such reasoning needs to be judicially examined when the law was completely silent on this aspect.
- o Removal of the words “Such as” and “Services used in relation to business” from the definition of input service was to counter the decision of Bombay High Court in case of Coca-Cola India Pvt Ltd, 2009 (242) ELT 168 and Ultra Tech Ultratech Cements, 2010 TIOL 745 HC Mumbai, in the aforesaid decision the honorable High court had expressed its view that "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business Rule 3 has been amended to specify that the Cenvat credit would not be allowed on inputs on which duty has been paid under the benefit of notification no.1/2011. Keeping the principles of functionality alive as laid down in case of M/s Maruti Suzuki Ltd. - 2009-TIOL-94-SC
- Rule 3 (5) has also been amended to further include that the reversal of credit/ payment of duty would not be required on inputs when they are removed under free warranty. For this purpose, free warranty means ‘warranty’ provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer.
- Rule 3(5B) is also amended and now the rule requires that the Cenvat credit availed to be paid back even if the Cenvat availed inputs or capital goods are partially written off. Earlier it was required only when the goods are fully written off. This change is effective from 1st March 2011.
- Rule 4 is amended to state that the Cenvat credit would be allowed even on capital goods which are received outside the factory and used for generation of electricity for captive used in factory.
- The Rule 4 (7) is amended to state that when any payment made towards the input service is returned then the manufacturer or service provider who has taken the credit on such input service shall pay proportionate amount to the cenvat availed in respect of such amount returned. This payment can be by utilizing the Cenvat credit or otherwise.
Major change in Rule 6
- Rule 6 of the Cenvat credit Rules 2004 has undergone major change. The heading of the rule itself has been changed as ‘Obligation of a manufacturer or producer of final products and a provider of taxable service’. Earlier the heading was ‘Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.
- This very change in the title of the rule will have serious implication as the argument of non applicability of the rule 6, when the manufacturer manufacturing dutiable goods also provides services which are not liable to service tax would not stand. The converse of which also holds good.
- In other words the assessee is curtailed to take the benefit of input/ input services, when the manufacturer was providing exempt services and service provider providing exempted goods.
- Further previously with trading not being considered either as exempted goods or exempted services, the benefit of input services which were commonly used for trading activity was possible, now with the change in definition of exempted service to include trading and also with the omission of the words “Activities in relation to business”, such arguments would not stand in the law.
- Sub Rule 1 has also been changed to state that the Cenvat credit benefit would not be allowed on inputs or input services which are used in or in relation to manufacture of exempted goods or for provision of exempted service. Earlier the rule has the wordings that the credit would not be allowed on ‘input or input service which is used in the manufacture of exempted goods or for provision of exempted service’. Due to this change, now the assesse is prevented from taking the contention of availing full credit on input or input service in relation to manufacture of exempted goods or provision of exempted goods.
- The sub rule 2 now provides for maintenance of separate records in more detailed manner in respect of receipt, consumption an inventory of inputs and the receipt and use of input services used
- In or in relation to manufacture of exempted goods;
- In or in relation to the manufacture of dutiable final products excluding exempted goods;
- For the provision of exempted services;
- For the provision of output services excluding exempted services.
- Earlier sub rule 3 required that the provider of output service providing exempted service to pay 6% on the value of exempted service and avail the Cenvat credit fully (unless any input/input service is exclusively used for exempted service). Now this rate of 6% has been reduced to 5%. The rate of 5% is applicable on exempted value in case of taxable services which are partially taxable. For example, if only 33% of construction service is taxable then 5% should be paid on 67% value.
- In Sub rule 3 in addition to option of paying 5% amount on exempted goods/exempted services or claiming the Cenvat credit proportionately as provided in Rule 6 (3A), a new option has been provided. The new third option would be to maintain separate accounts for the receipt, consumption and inventory of inputs as provided in the new rule and pay an amount as determined under sub-rule (3A) in respect of only input services.
- In addition to the above changes, a new explanation has been added to state that the payment of amount of 5% as discussed above would be deemed to be Cenvat credit not taken for the purpose of an exemption wherein exemption is granted on condition that no Cenvat credit of inputs and input services shall be taken.
- As even trading activity would be considered as ‘exempted service’ as per the amendments, the value of trading activity should also be considered for availment of credit proportionately. The value of such trading would be difference between the sale price and the purchase price of the goods trade.
- A major hit in this budget has been the omission of rule 6 (5). Earlier as per this rule, on as many as 16 common services such as security services, banking or financial services etc. the assessee could have claimed the credit of service tax paid to the extent of 100% even if they are partially used for taxable activity. Now, even these services would be subject to proportionate formula as specified in Rule 6 (3A).
- A new rule 6 (6A) has been introduced with effect from 1st March 2011 to state that the provisions of Rule 6 shall not be applicable in case of taxable services provided, without payment of service tax to SEZ unit or developers for their authorized operations. However the services which are exempted from payment of taxes vide exemption notification are considered as exempted services and consequently the benefit of cenvat credit attributable on such portion is restricted.
- In rule 9(7) of the Cenvat Credit Rules under first proviso, a manufacturer availing exemption notification based on value or quantity of clearances in a financial year, he shall file a quarterly return in the form specified, by notification, by the Board within ten days after the close of the quarter to which the return relates. (previously the same was to be filed within twenty days after the close of the quarter to which the return relates)
By Madhukar.N.Hiregange, FCA
By Madhukar.N.Hiregange, FCA
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