LEARNING OUTCOME

Making aware of the CENVAT Credit concept

WHAT IS CENVAT?VAT: Tax on Value Added

• Value Added = Value of Final Output - Value of Inputs used.

• Imposed on - every stage of Manufacture/ Sale.

• Each time – only Value Added – by Manufacturer/ Seller – subject to tax.

CENVAT

• Value Addition – by way of manufacture/ provision of Output Service.

• Value Addition – TAXED – by using Credit Method.

CENVAT CREDIT?• Allowed on: Eligible duties - paid on eligible inputs/

capital goods.Service Tax paid – eligible input services.

• Applies only on :Manufacturer orOutput service provider

CENVAT CREDIT?• Governed by: CENVAT Credit Rules, 2004

• Available on :Capital Goods defined in Rule (2a)Inputs defined in Rule (2k)Inputs services defined in Rule (2 l)

WHY NEED OF CENVAT CREDIT?

TO REMOVE CASCADING EFFECT OF DUTY

TAX ON TAX

EXAMPLE:1) Buys raw material – Rs. 224

(Rs. 24 – Excise Duty)2) Avail services worth Rs.112

(Rs.12 – Service Tax)3) Incurs expenses: Rs.300 – manufacturing final product4) Wants to earn profit - Rs. 505) Excise duty – 12 %

Solution:Cenvat Credit: (Rs. 24 + Rs. 12 = Rs. 36)• Cost of manufacture: 200 + 100 + 300 = Rs.600• Sale Price = Cost + Profit: 600 + 50 = Rs.650• Excise Duty = 650 * 12% = Rs. 78• Net Excise Duty Payable = 78- 36 = Rs.42

COST TO CONSUMER: 650+78 = Rs. 728

Cenvat Credit: NIL• Cost of manufacture: 224 + 112 + 300 = Rs.636• Sale Price = Cost + Profit: 636 + 50 = Rs.686• Excise Duty = 686 * 12% = Rs. 82.32

COST TO CONSUMER: 686+82.32 = Rs.768.32Aforesaid - lead to cascading effect:i.e. Input Credit – Rs. 36 – was again – subject to DUTY

COST TO CONSUMER: 686+82.32 = Rs.768.32

Aforesaid - lead to cascading effect:i.e.

Input Credit – Rs. 36 – was again – subject to DUTY @ 12%: Rs. 4.32Consumer bearing extra cost: Rs.40.32

(Rs. 36 + Rs. 4.32)

CAPITAL GOODS (Rule 2a)1. All goods – falling under – 1st Schedule - Tariff

Act:• Chapter 82: tools, hand tools, knives etc.• Chapter 84: nuclear reactors, boilers, etc.• Chapter 85: electrical machinery• Chapter 90: measuring, testing & checking

machines.• Sub-heading 6805: grinding wheels & the likes• Sub-heading 6804: Abrasive powder used in

textile/ paper etc.

CAPITAL GOODS (Rule 2a)

2. Pollution control equipment3. Components, spares, accessories of goods -

specified in (1& 2)4. Storage tanks5. Motor Vehicles and their components/ spares (other than mentioned in 8702, 8703, 8704, 8711)6. Tubes, pipes and fittings thereof7. Moulds and dies, jigs & fixture.

• AC, Refrigerator & computers: Capital Goods?- Yes, if used in factory not in offices.

• Whether “Capital Goods” – must be used in manufacture

- No, Use within factory is sufficient or outside factory – generation of electricity – captive consumption

How Credit is taken on Capital Goods?

Allowed on Receipt of capital Goods

In factory/ by output service providerManner:- up to 50% credit – 1st Year of acquisition- balance is allowed in 2nd / subsequent years- SSI: Turnover is Rs.400 lakh: 100% credit – 1st Year.

How Credit is taken on Capital Goods?Example:1) Consignment of inputs received: 1,000 kg2) Excise duty paid: Rs.10,0003) While unloading, 50 Kg.- damaged and not

usable4) Eligibility of Cenvat Credit.Solution:• Inputs – lost before issuing – manufacturing• No – relation with – manufacture• Available Cenvat Credit: Rs.9,500

How Credit is taken on Capital Goods?Example:1) Consignment of inputs received: 500 pieces2) Excise duty paid: Rs.2,5003) Issued to production line, fire broke, 200

pieces – destroyed- lying on floor4) Eligibility of Cenvat Credit.Solution:• Inputs – lost during – manufacture process• Relation with – manufacture• Available Cenvat Credit: Rs.2,500

How Credit is taken on Capital Goods?Example:1) Inputs received2) Excise duty paid: Rs.20,0003) Assessee used 60%, (40% cannot – due to

change in design – provision for ‘obsolete good’)

4) Eligibility of Cenvat Credit.Solution:• Reverse Cenvat Credit: Rs.8,000

INPUT GOODS (Rule 2k)

All goods - used in the factory – manufacturer.Any goods – including accessories –

Cleared from factory

value of which is included in – Final product

Goods used for – providing - free warranty- final product

INPUT GOODS (Rule 2k)

All goods – used for – generation: electricity/ steam for captive consumption.

All goods – used for – providing – output services.

EXCLUDING:• Light Diesel Oil, High Speed Oil or motor spirit.• Any good- used for: - construction of building/ civil structure - laying foundation- support – capital good.• Motor vehicle (refer Pg No. 385)• Any good- used in: Primarily for PERSONAL

USE/ CONSUMPTION- of any employee. - Guest house/ residential colony - food items - club/ recreational facilities.

EXCLUDING:• Capital goods except when used as

component/ part - manufacture

• Any good – whatsoever – no relation with manufacture – final product

E.g. furniture/ stationery used in factory hand gloves used by workmen

Considered as Input goods

CASE STUDY: Maruti Suzuki Ltd. V/s CCE (2009)

Case: Eligibility of Cenvat Credit on fuel used for generation of electricity, sold outside to sister units, vendors, etc.

CASE STUDY: Maruti Suzuki Ltd. V/s CCE

Facts: • Manufacturer - Automobiles• Set- gas turbines – electricity generations• Using Naptha – fuel• Used – captive and partly supply to joint

ventures- charge• Claiming Credit – whole inputs

CASE STUDY: Maruti Suzuki Ltd. V/s CCE

Decision:• Generation of electricity – ancilliary activity• Captive – input otherwise NOT• Electricity generation – NOT used – relation to

manufacture – within the factory• Hence, CANNOT Claim credit – electricity –

supplied to sister concern/ joint ventures

Example: Determine eligible amount of CENVAT.1. Pollution control system 25,0002. Spares for pollution control system 5,0003. Equipment used in office 12,0004. Storage tank 10,0005. Paints used for painting machinery 6,0006. Packing material 4,0007. Lubricating oils 8,0008. High speed diesel oil. 7,000

Solution: 1. Pollution control system Capital Goods 12,5002. Spares for pollution control system Capital Goods 2,5003. Equipment used in office Not Eligible NIL4. Storage tank Capital Goods 5,0005. Paints used for painting machinery Input 6,0006. Packing material Input 4,0007. Lubricating oils Input 8,0008. High speed diesel oil. Not Eligible NIL__________________________________________________Total Cenvat credit Admissible 38,000__________________________________________________

Example: Determine eligible amount of CENVAT.1. Raw Materials

52,0002. CG- Used in electricity generation(CC)

1,00,0003. Motor Spirit 40,0004. Inputs used- Construction of Bldg.

1,00,0005. Dairy & bakery products- consumed- employees 5,0006. Motor Vehicle falling under tariff-heading 8704 4,50,000

Example: Determine eligible amount of CENVAT.1. Raw Materials 52,0002. CG- Used in electricity generation(CC)

50,0003. Motor Spirit NIL4. Inputs used- Construction of Bldg. NIL5. Dairy & bakery products- consumed- employees NIL6. Motor Vehicle falling under tariff-heading 8704 NIL__________________________________________________Total Cenvat credit Admissible 1,02,000__________________________________________________

INPUT SERVICE (RULE 2 l)

Services For Output Service: any service provided for – Output

Service Manufacturer of final product: any services used

Directly/ Indirectly - in or in relation to:i. Manufacture of final products andii. Clearance of final product from place of removal

INPUT SERVICE (RULE 2 l)

Services

Included Excluded

18 Services

Five M’s

Inclusive Services:1. Any modernization/ repairs of factory premises.2. Advertisement or sales promotion3. Market research4. Accounting5. Auditing6. Financing7. Computer networking8. Security9. Legal services10. Quality control

Excluded Services: 1. Rule 2(l)(A):

Services related to construction of building or civil structure OR

Laying foundation or making structures – support capital goods

• Architect Services• Port services• Airport services• Works contract services

Excluded Services: 2. Rule 2(l)(B):

Services related to Motor Vehicle provided by way of • Renting of a cab• Supply of tangible goods

In so far – as they relate to vehicle – which is not Capital Good

Motor Vehicle – considered - CAPITAL GOOD – only in case od specified services.

2. Rule 2(l)(BA):Services related to Motor Vehicle

provided by way of • Repair and maintenance• servicing• general insurance business. In so far – as they relate to vehicle – which is not Capital

GoodException in respect of:To manufacturer of vehicle – manufactured by himGeneral insurance company – vehicles insured by him

Excluded Services: 3. Rule 2(l)(C):

Services related to primarily for Personal Use/ Consumption of any employee

• Outdoor catering• Beauty treatment• Health services• Membership of club, health & fitness center• Life insurance• Travel benefits extended to employees

W.e.f. 01-04-2011:Service Tax payable on accrual basis

Not receipt basis

Cenvat Reversal - if payment not made

Service Provider – within 03 months

Input Service Distributor: Read page no. 381