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Service TaxService Tax
CENVAT CREDITCENVAT CREDIT
Sushil AggarwalSushil AggarwalAnil Sushil & Co.Anil Sushil & Co.
Chartered AccountantChartered Accountant
1, Temple Complex, Shiv Mandir, Tilak1, Temple Complex, Shiv Mandir, Tilak
Bridge, New Delhi 110 001.Bridge, New Delhi 110 001.
Ph. 2337 1637, 2337 1937Ph. 2337 1637, 2337 1937
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Step Towards Integration
In the budget 2004-2005 the idea to
extend credit of service tax and excise
duty across goods and services was
mooted.
The CENVAT Credit Rules, 2004 came
into force from 10-9-2004, and have
replaced the CENVAT Credit Rules, 2002and Service Tax Credit Rules, 2002.
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What is available as credit
CENVAT credit of excise duty (includingadditional excise duty etc.) and the servicetax and the Education Cess on taxableservices and excisable goods, which is
paid on- Any input or capital goods received in the
premises of the provider of output service onor after the 10th day of September, 2004, and
Any input service received by the provider ofoutput services on or after the 10th day ofSeptember, 2004,
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Components of eligible duty & Tax The duty of excise specified in the First and the
Second Schedule to the Excise Tariff Act, leviable
under the Excise Act,
The additional duty of excise leviable under
section 3 of both (i)the additional Duties of Excise
(Textile and Textile Articles) Act, 1957 and (ii)additional Duties of Excise (Goods of Special
Importance) Act, 1957. Also the additional duty of
excise leviable under section 157 of the Finance
Act, 2003. The National Calamity Contingent duty leviable
under section 136 of the Finance Act, 2001,
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Components of eligible duty & Tax The Education Cess on excisable goods leviable
under section 91 read with section 93 of theFinance (No. 2) Act, 2004,
The additional duty leviable under the CustomsTariff Act,
The service tax leviable under section 66 of theFinance Act,
The Education Cess on taxable services leviableunder section 91 read with section 95 of the
Finance (No.2) Act, 2004, the additional duty of excise leviable under
section 85 of the Finance Act, 2005
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When credit is available
The CENVAT credit in respect of inputs
may be taken immediately on receipt of
the inputs in the premises of the provider
of output services
Components of eligible duty & Tax
An importer who pays CVD (countervailingDuty) by a debit in DEPB pass book may
not be eligible to credit in the absence of
express provisions.
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Payment of input service is
pre-condition The credit is allowed only after the payment of
service tax as indicated in invoice. [sub-rule (7)of Rule 4].
There is no express provision for partialallowance based on part payment or settlementfor a lower value.
Contrarily liability of tax on output service arises
even on receipt of part payment. A logical presumption is that credit should be
ava
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What is not input Light diesel oil, HS diesel, petrol whether used in
relation to manufacture of goods or for provision ofservice, irrespective whether used directly orindirectly and whether contained in the finalproduct or not.
Also included in the above list are lubricating oils,greases, cutting oils, coolants, accessories of thefinal products cleared along with the finalproducts, goods used as paint, or as packing
material, or as fuel, or for generation of electricityor steam used in or in relation to manufacture offinal products or for any other purpose, within thefactory of production,
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What is input and input service
Input include goods used in the manufacture of capital goods
which are further used in the factory of the manufacturer
Input service means any service,-
used by a provider of taxable service for providing an
output service, or
used by the manufacturer, whether directly or indirectly, in
or in relation to the manufacture of final products and
clearance of final products from the place of removal,
A co-relation of inputs to output is thus a must.
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What is input and input service Services used in relation to setting up,
modernization, renovation or repairs of a factory,premises of provider of output service or an officerelating to such factory or premises, advertisementor sales promotion, market research, storage upto
the place of removal, procurement of inputs,activities relating to business such as accounting,auditing, financing, recruitment and quality control,coaching and training, computer networking, credit
rating, share registry and security, inwardtransportation of inputs or capital goods andoutward transportation upto the place of removalare also input services. [clause (1) of rule 2]
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Importance of place of removal Sec.4(3)(c ) of the Central Excise Act stipulates as
under:
"place of removal" means-
i. a factory or any other place or premises of production
or manufacture of the excisable goods;ii. warehouse or any other place or premises whereinthe excisable goods have been permitted to bedeposited without payment of duty,
iii.a depot, premises of a consignment agent or anyother place or premises from where excisable goodsare to be sold after their clearance form the factory.
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Impractical Situations Question may arise as to allowability of CENVAT credit on
tax paid on transportation used after place of removal.What is the logic of such disallowance. Shall it extend totransportation incurred on after sales maintenance andfree replacements.
Condition relating to receipt of goods in the premises for
availing cenvat credit. CENVAT Credit for the excise duty paid on any input or capital
goods will be allowed as credit only if such input or capitalgoods are received in premises of output services provider
in case of a tour operator, he does not bring the motor vehicle inits premises but are used for the rendering of output service
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Credit of education cess only
against education cess The credit of the Education Cess on
excisable goods and the Education Cess
on taxable services can be utilized either
for payment of the Education Cess onexcisable goods or for the payment of the
Education Cess on taxable services
[proviso to clause (b) of sub-rule (7) ofRule 3]
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Utilization / Application of credit When to utilise
The CENVAT credit may be utilized for payment ofservice tax on any output service, but the
CENVAT credit shall be utilized only to the extent
such credit is available on the last day of the
month or quarter, as the case may be [sub-rule (4)of Rule 3].
A question may arise, whether CENVAT credit can
be used to pay interest and penalty. (note2 of ST3). Refund of unused credit shall not be allowable under
any circumstances. (Rule 4(2))
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Utilization / Application of credit
Reversal / utilization of Credit
The CENVAT credit may be utilized for payment of-
a)An amount equal to CENVAT credit taken on
inputs if such inputs are removed as such or afterbeing partially processed or
b)an amount equal to the CENVAT credit taken oncapital goods if such capital goods are removed assuch or
service tax on any output service:
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Utilization / Application of credit
Availing of credit is subsequent to recording ofcredit. Recording and reversing amounts to notavailing the credit and no penalty can be invoked.
credit can be denied to an assesse under the ruleonly on two grounds, firstly for having not used the
inputs in the manufacture of goods and secondlyfor having removed the inputs as such. The creditcannot be denied to the assessee for having failedto utilize the inputs for a long time or for having
written of the value of the inputs in the books.(CCE, Indore v. M/s Kinetic motors Co. Ltd.)
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Transition from exemption to taxability
In case where a service which ceases to be an
exempted service, the provider of the output serviceshall be allowed to take CENVAT credit of the dutypaid on the inputs (not input services) received onand after the 10th day of September, 2004 and lying
in stock on the date on which any service ceases tobe an exempted service and used for providing suchservice
This benefit is apparently not available on transition
to taxability on crossing of 4 lac barrier. The credit in respect of input services availed andlying as part of stock & WIP should be available onlogical grounds in the absence of specific denial.
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Transition from old to new rules As per Rule 11, the service tax and excise duty credit lying
un-availed under the Service tax credit rules, 2002 or
CENVAT credit rules 2002 shall be allowed to be utilisedunder the CENVAT credit rules, 2004.
As per Rule 11, the amount of credit of input orinput services as comprised in the value of closingstock of Raw material, WIP and finished goods on
the date of transition from taxability to exemptionshall have to be paid back. This law is applicableonly for claiming value / qty based exemptionduring a fy. year.
Transition from Taxability to exemption
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Credit for inputs used in exempt services
cenvat credit is not available in respect of inputs
contained in scrap (exempted goods).
Exceptions to this rule are:
the credit utilized when final products is dutiable, can
not be reversed if subsequently the exemption is
withdrawn.Commissioner of Central Excise Rajkot Vs.
ASHOK Iron & Steel Fabricators, 2002 (140) ELT 277
Separate books of accounts be kept where both taxable
and non-taxable services are being rendered. Record of
receipt, consumption and inventory should be
maintained.
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Credit on common inputs for taxableand exempt services
In the absence of separate record credit availability shallbe restricted to 20% ofoutput tax.
Unused balance of credit can however be carried forwardindefinitely.
Where credit available is less than 20% of output liability
the whole credit should be allowed. W.E.F. 16/05/05 explanation III has been added to rule 6
(3) to restrict availability of credit where input is incurredexclusively in respect of exempted goods/ services.
A question may arise, can a trader, rendering taxableservices in addition to trading, adopt the 20% formula in
the light of the fact that trading is no service at all.
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Consignment makes business sense Trading is not a taxable service. It is rather not a service.
Trading as agent is covered under Business Aux.Services.
Agent can claim tax input on advertising, marketresearch etc. but trader can not.
This is over and above the VAT free stock transferadvantage.
ISSUES A question may arise as to availability of input service tax
credit to a share broker who in addition to trading on
behalf of customers and sub-brokers trades on his own. Similar issue may arise in case of company engaged in
wholly taxable activity but extends interest bearing loansfrom its surplus funds.
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Option of mixed system of credit Assessee providing many services
For some services, separate input record ismaintained
For others common inputs are used
Law does not prohibit use of different method of
claiming credit in respect of different services Law itself provides for full credit for 16 input services
unless they are inputs, exclusive to exempt services.Services of the like Consulting Engineer, Architect,
IPR, Construction, Banking, Real Estate, Security,Management consultancy are included here.
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Abetments and exemptions
Notif. 1/2006 provides that a service
provider who claims an abetment shall not
be eligible to input credit.
Where a construction job is sub-
contracted the contractor will not be able
to claim credit of input service tax charged
on the bill of the subcontractorsimultaneous to his claim for abetment.
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Matching of input to output service
There is no specific requirement of matching
each input service to corresponding outputservice for claiming the credit.
Credit for expenditure on Mobile Phone
Mobile phone expenditure was hitherto notMobile phone expenditure was hitherto not
allowed under the Service tax credit rules,2002.allowed under the Service tax credit rules,2002.
Only expenditure in respect of phones installed atOnly expenditure in respect of phones installed at
the premises from where the service is providedthe premises from where the service is providedwas allowed. There is no such restriction with thewas allowed. There is no such restriction with the
Cenvat Credit Rules, 2004.Cenvat Credit Rules, 2004.
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Credit on Capital Goods
Capital goods are:
i. all goods falling under chapter 82, 84, 85, 90,heading no. 68.02 and sub-heading no. 6801.10 ofthe first schedule to the excise tariff act (thesechapters include defined items of machinery, tools,optical, photographic, medical instruments, abrasivematerial etc.)
(ii) pollution control equipment, (iii) componentsspares and accessories of above specified goods,(iv) moulds and dies, jigs and fixtures,(v) refractoryand refractory materials,(vi) tubes and pipes andfittings thereof, and (vii) storage tank,
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Credit on CG -Restrictions Capital goods used in factory (and not in
office) are eligible to credit. In case of output service provider also the
credit is available. The restriction of use in
office is apparently not there. For motor vehicles the credit is availableonly to couriers, tour operators, cargohandling agency, goods transport agency,
outdoor caterer, pandal & shamianacontractor & rent a cab operator.
C dit CG d
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Credit on CG - procedure Credit is available in two parts of 50% each. One in
the year of acquisition and the other in the subsequent
year. There is no condition of put to use or installation. capital goods acquired on lease, hire purchase or loan
are equally eligible to credit.
On clearance of capital goods in the first year itself theentire credit shall be available.
Depreciation on duty is not allowed. Dealer to takeonly one benefit.
Credit is not denied if CG are sent for job work andreceived with in 180 days. Beyond this period thecredit will have to be reversed and reclaimed once thegoods are received back.
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Credit reversal - removal of CG
On removal (except for providing the outputservice) CENVAT credit as availed on such goodsshall have to be reversed / paid.
Removal shall be under the cover of an invoice.
No reversal if removal is as scrap / waste.
However duty as applicable on scrap / waste shallbe chargeable by manufacturer. This would notapply to service provider.
CENVAT credit shall not be available on capitalgoods used exclusively for exempted goods /services
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Refund of CENVAT credit
Exports not only entail transfer of goods and services
without charging any duty or service tax they also entitle theexporter to claim credit for duty and service tax paid on
inputs and input services against his other taxable activity.
Where adjustment is not possible, law provides for refund.
Cenvat Credit Rules provide for refund in case of exportingmanufacturers. Export of service rules provide for refund in
case of services export.
Refund of credit shall be not be allowed where the exporter
avails drawback or rebate of duty under the relevant rules. A question may arise on availability of credit to merchant
exporters.
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Input service distributor Where several manufacturing units or service
providing units, scattered geographically, work underan umbrella of a (say) head office and the head officeeither incurs common expenses or procures inputscentrally or even clears all bills for supplies or services
centrally, the units will be unable to claim the cenvatcredit on such payments. There may situations whereservices or goods are received by units or whereexpenses like marketing, management consultancy or
advertisement are incurred centrally. To circumvent such a situation the distribution ruleshave been introduced for the first time.
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Conditions for distribution of Credit
1. Credit can not be distributed in excess of
the amount of service tax paid by the
distributor,
2. Credit attributable exclusively to
exempted goods or services shall not be
distributed.
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Registration of Distributor
input service distributor shall have to issue an
invoice or a challan,signed & serially numbered andcontaining in addition to the amount being
distributed, the particulars of the service provider,
credit distributor and the recipient of the credit. Such
provisions did not exist in law prior to 16/06/05.
Procedure for distribution
The distributor shall need to seekregistration and shall be required tofile regular returns.
M i t f R d
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Maintenance of Records the burden of proof regarding the admissibility of the
CENVAT credit whether on inputs, input services or oncapital goods, shall lie upon the manufacturer orprovider of output service taking such credit. [sub-rule(5) of rule 9].
The manufacturer of final products or the provider of
output service shall maintain proper records for thereceipt, disposal, consumption and inventory of theinput and capital goods in which the relevantinformation regarding the value, duty paid, CENVAT
credit taken and utilized, the person from whom theinput or capital goods have been procured etc. isrecorded. Thus no specific record is prescribed.
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Documents entitling credit
Invoice issued by either the manufacturer or importer or
from a registered depot of the importer or his consignmentagent.
Invoice issued by a first stage or a second stage dealer.
A supplementary invoice, issued by a manufacturer or
importer of inputs or capital goods. A bill of entry.
A certificate issued by an appraiser of customs in respect ofgoods imported through a Foreign Post Office.
an invoice, bill or challan issued by an input servicesdistributor under rule 4A of the Services Tax Rules, 1994.[sub-rule (1) of rule 9]
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Documents entitling credit
A challan evidencing payment of service tax by the
person liable to pay service tax under sub-clauses (iii),
(iv), (v) and (vii) of clause (d) of sub- rule (1) of rule (2) of
the Service Tax Rules, 1994,
The above clause has been amended, w.e.f. 16-6-2005to provide that in case of input service of goods transport
service is utilized then CENVAT Credit can be availed on
the strength on the TR-6 Challan. This is trade facilitation
measure taken by the Government as severalrepresentations were made to the Government in this
regard.
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Contents of an Invoice The invoice / Challan shall be signed, serially
numbered and shall contain:- The name, address and the registration number of the
issuer,
The name and address of the person receiving taxableservice
Description, classification and value of taxable serviceprovided or to be provided; and
The service tax payable thereon.
In the absence of some of the above particulars thecredit may not be denied if the authorities aresatisfied that the tax under review has been paidand the input credit is being legitimately claimed.
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Payment of tax to ensure before
taking CENVAT Credit The output service provider or the input service
distributor taking CENVAT credit shall take
reasonable steps to ensure that tax on such
goods / services has been duly paid by hisinput / service provider.
To satisfy oneself about the identity and address
of the person issuing invoice is such a
reasonable step. To keep a copy of certificate ofregistration of such person is also such a step.
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THANKS