Input reversal of service tax

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Sivaramakumar (Querist)
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18 June 2015 I would like to know whether there is any provision in the service tax act to reverse the input on services for a service oriented company, when the expenditure is paid in full and the service remains in progress without being invoiced? if any portion of the expenses is treated as prepaid as per accounting norms whether such input credit taken needs to be reversed/

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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18 June 2015 Yes it has to be reversed, it can be claimed against the relevant out put service only.
In the manufacture of product X, if raw material A and raw material B are used, the manufacturer is allowed to take credit of the Central Excise duty paid on the raw materials A and B used in the manufacture of the final product X. He is allowed to use this credit while paying duty on the final product, X

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Sivaramakumar

Sivaramakumar (Querist)
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18 June 2015 As suggested by you the common inputs not utilised in the manufacture or written off needs to be reversed.in my case the input on services has already been adjusted/availed in the relevant month itself.Cenvat credit rules specify the reversal of inputs on raw materials but does not have a mention about the input on services.As the expenses paid on this account is still available for consumption to be utilised in the output bills to be raised in the next year.

We just hold these expenses as prepaid only for the purpose of providing a true and fair view of the accounts as debiting the entire expenses would result in a loss

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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01 August 2024 Under the Service Tax regime, the treatment of input credit for services that remain in progress or are partially utilized can be nuanced. Here’s a breakdown of how to handle such situations:

### **1. General Rules for Input Service Tax Credit (Cenvat Credit Rules):**

- **Input Service Credit:** Under the Cenvat Credit Rules, a service provider can claim input credit on services used in or in relation to providing output services.
- **Claiming Credit:** The credit is available once the service is received, regardless of whether it has been fully invoiced or consumed.

### **2. Provision for Reversal of Input Credit:**

#### **Reversal of Input Credit for Unutilized or Written-Off Inputs:**
- **Rule 6 of Cenvat Credit Rules, 2004:** This rule covers the reversal of input credit in cases where inputs and input services are not used in the manufacture of dutiable goods or provision of taxable services. It mainly addresses situations where the credit on common inputs or services needs to be reversed if they are not used for taxable output.

#### **Specific Cases:**
- **Expenses Paid but Service Not Invoiced:**
- **Invoicing:** If the service remains in progress and is not yet invoiced, the credit can still be claimed if the service has been received and is intended for use in providing taxable services.
- **Prepaid Expenses:** If the expenses are treated as prepaid, the credit should still be available provided the service is intended to be used in the taxable output. Prepaid expenses do not directly affect the availability of input credit as long as the underlying service is used for taxable purposes.

#### **Accounting Norms:**
- **Accounting Treatment:** From an accounting perspective, treating expenses as prepaid is an accounting treatment and does not affect the input credit under service tax rules.
- **Impact on Input Credit:** If input credit is taken in the relevant month and the service is still in progress, the credit should not need to be reversed just because it is categorized as prepaid. The credit is based on the receipt of service and not on the invoicing status.

#### **Common Inputs Not Utilized:**
- **Reversal of Credit:** If common inputs or services are not utilized in the provision of taxable services, Rule 6 mandates a reversal. However, this applies when the input services are used for both taxable and exempt services or goods.

### **3. Documentation and Compliance:**
- **Maintain Documentation:** Ensure all documentation related to the services and input credit is maintained correctly. This includes invoices, payment receipts, and details on how the services are utilized.
- **Compliance:** Ensure compliance with the relevant provisions of the Cenvat Credit Rules. Reversal may not be required if the service is used in providing taxable services.

### **Relevant Notifications and Rules:**
- **Cenvat Credit Rules, 2004:** Detailed provisions can be found in the Cenvat Credit Rules, specifically in Rule 6 and related notifications.
- **Notifications and Circulars:** Look for relevant notifications and circulars issued by the CBEC (Central Board of Excise and Customs) which provide clarifications on input credit and reversal.

### **Conclusion:**
As long as the services are intended for use in providing taxable output services, the input credit can be claimed even if the service is partially in progress and invoicing is not completed. The fact that expenses are treated as prepaid for accounting purposes does not necessitate a reversal of input credit, provided the underlying service is used for taxable purposes.

For specific issues and compliance, consult the latest Cenvat Credit Rules or seek advice from a tax professional.

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