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Value Addition through Cenvat Credit

Madhukar N Hiregange 
on 21 January 2016

LinkedIn


The manufacturers and service providers today are facing increasing tax rates some of which may need to be absorbed while dealing with customers who cannot avail the credit. Even otherwise the non availment of eligible credit could lead to margin getting eroded. Service Tax already at 14.5% and possibly central excise would follow suit in the budget 2016.

The cenvat credit scheme was initially envisaged to provide relief on all cascading of taxes. However over a period of time in Central Excise and more so in service tax, the restrictions have been placed as a measure of revenue augmentation by the Revenue. Inspite of the specific restrictions, credit can account for 50-70% of the tax adjustment.

We examine some of the best practices to ensure that eligible credits are maximised within the frame work of law as under:

1. The statutory or internal auditor should insist on the reconciliation of the credits in addition to the manufacture or service tax payment. This can be broadly verified by examining the material cost vis a vis the %age of payments made by utilising credit. This would also be useful to report under Point no 4 of new Tax Audit Report.

2. Top management should build in IDT main impact reporting system in the MIS. Net VAT cost, Net CE cost or net ST cost being reported would be useful. Credit %age under CE/ ST/ VAT of total tax could also be reported.

3. Every year a list of credit, which can be availed and not availed can be prepared. Those that are objected by the revenue or those that are doubtful can be availed and reversed under protest with prior intimation to revenue. If availed and utilised interest costs could become a burden.

4. Exempted service providers can opt to pay tax and avail the credits available where the customer is eligible for credit. Similarly when there is doubt on the taxability of a service this option is advisable.

5. At times the credit on the reverse charge and joint charge credits are missed as they are paid by the assesse himself. At times the timing may lead to disallowances.

6. Ownership of Capital goods not required in order to claim credit on capital goods. Even when one procures goods under hire purchase, the credit could be availed, subject to following proper procedures. Example could be capital goods used in job work unit not registered or sent to independent job worker. Credit available to the principal.

7. Capital Goods do not include any equipment or appliance used in an office unless it is part of factory or used for providing taxable services. Whether used for activities of business can be examined.

8. Credit of duty paid on inputs is to be reversed as per Rule 6 of the CCR, 2004, where inputs are used for manufacturing excisable and exempted goods, or for providing taxable and exempted service.  Exempted goods would not include the portion on which abatement claimed unless credit is restricted for both inputs as well as input services. They would also not include inputs/ input services used for export. Possibility of reversing credit based on cost accounting principles could prove beneficial.

9. Cenvat credit not eligible if capital goods are used exclusively for manufacturing exempted goods or providing exempted service. Unlike credit on inputs, full credit is eligible on partial usage of capital goods for manufacturing excisable and exempted goods, or for providing taxable and exempted service.

10. Restriction of availing 50% of credit on purchase of capital goods does not apply to the assessees claiming SSI exemption or when the capital goods are removed as such.

11. If the assessee removes the capital asset purchased in the same financial year in which it is purchased, then the assessee can claim 100% credit in the same financial year.

12. Balance 50% credit on capital goods shall be allowed to the assessee in the subsequent year, subject to a condition that the capital asset is in possession of such assessee. However, this condition does not apply to components, spares, accessories, moulds, tools, dies, refractories and refractory material.

13. The assessee can claim either the benefit of cenvat credit or depreciation. Credit is much more advantageous.

14. Rule 7: Prior to the insertion of the last condition pertaining to the pro rata distribution of credits, there was no restriction for distributing the credits to a unit, though the credit was not wholly related to such unit [upheld by the Honourable Karnataka HC in the case of Ecof Industries Pvt Ltd., [2012 (277) ELT 317 (Kar.)]. Therefore, though CCR, 2004 is a beneficial legislation, the various conditions imposed and additional conditions inserted by way of amendments to such rules are becoming stringent day by day. These conditions, in a way cut short the benefits under CCR, 2004. 

15. Service providers shall not be eligible to take credit of such additional duty under section 3(5) of the Customs Tariff Act (Additional CVD). However manufacturers can avail the same. Traders can get refund on proof of sale of the goods.

16. CENVAT Credit is available on any inputs or input services used in the manufacture of intermediate products by a job worker and received by the manufacturer for further use in relation to manufacture.

17. Under Rule 5, a person exporting goods and service simultaneously, may submit two refund claims one in respect of goods exported and other in respect of the export of services every quarter. Now for service exporters a new scheme wherein 80% of the claim would be paid up has been introduced.

18. The motor vehicle credit has been extended to those, which are used for providing output services: motor driving school, mining, transportation of passenger/ goods, construction, courier, logistics, freight forwarders or mere renting of motor vehicles.

19. Dealers can also pass on cenvat credit of imported or duty paid goods selectively. They can pass on where customer wants and oin other cases raise a commercial invoice.

20. The reversal of credit on oral instruction of visiting officers or audit without due verification can cause issues in re credit.  If being forced, the same maybe paid under protest.

21. Cenvat credit refund is eligible for the manufacturers who claim drawback of only customs. Service tax refund is also available separately for credits after place of removal.

22. Job workers can also retain the credit used in consumables and capital goods/ spares used in job work as long as they are working under Not.214/86, where the principal undertakes to pay duty on his further finishing of the goods.

23. Job workers who do an activity amounting to manufacture can avail the credit and discharge the duty on the finished goods.

24. Job workers can chose to pay service tax on processes not amounting to manufacture where the manufacturer can avail credit against his final duty payment to reduce the impact.

25. There are implication of scrap ta the job workers end if not returned. Quantity reconciliation are imperative.

26. Restaurants under abatement can avail credit for inputs [ beyond chap. 22) , input services & capital goods.

27. In case of construction of Malls, capital goods [ escalators, lifts, DG sets etc] maybe eligible for credit. Judicial confirmation awaited.

28. Supplies to contracts under International competitive bidding, SEZ, 100% EOU are without payment of duty but credit can be retained.

29. In refund for manufacturers the method of payment of duty using cenvat has been found fastest.

30. Capital goods does not cover certain items of capital nature, the credit as Inputs in such cases could be examined.

31. The credit on inputs used as consumables in service contracts can be examined. Paper credit for photography or in study material for coaching classes.

32. Transfer of credit in case of shifting, merger etc.   

33. There are many more…

As discussed above, the Cenvat Credit Rules, 2004 has brought many advantageous rules including cross sectional credits and refund facility. This, in a way, reduces the cost for manufacturers as well as service providers and the ultimate consumers. However, one would have to be extremely careful as to the eligibility conditions and restrictions that are attached to these beneficial rules. For doubts Contact: madhukar@hiregange.com.

CA Madhukar N Hiregange


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