Transcript Service Tax The tax of 21st Century

Cenvat Credit
V S Datey
Website – http://www.dateyvs.com
Welcome
My Introduction
V S Datey (Age 69), B Tech (Hons),
FCS, FCMA
 Worked as Finance Manager and
Secretary in leading listed companies
during 1965-1993
 Writing books on indirect taxes and
corporate laws and consultancy in
indirect taxes since 1994

Conventional Tax System
Detail
B
C
-
110
165
Value Added
100
40
35
Sub-Total
100
150
200
10
15
20
110
165
200
Purchases
Add Tax 10%
Total
A
Tax credit System under Vat
Transaction without VAT
Details
A
Purchases
-
B
110
Value
Added
100
Subtotal
Transaction With VAT
A
-
B
100
40
100
40
Add Tax
100
10
150
15
100
10
140
14
Total
110
165
110
154
Highlights

Instant Credit
 One to one co-relation not required in
Vat/Cenvat
 Credit of excise duty on inputs and capital
goods and service tax on input services.
 The credit is inter-changeable, except that
credit of education cess and SAHE cess for
education cess and SAHE cess only
Utilisation of Cenvat Credit
All taxes and duties specified in rule 3(1)
of Cenvat Credit Rules form a ‘pool’. This
credit can be utilised by manufacturer of
excisable goods or provider of taxable
service, for payment of any tax or duty
as specified in rule 3(4) of Cenvat Credit
Rules
 One to one relation not required

Eligible duty paying documents
Original or Duplicate Invoice, Dealer’s
Invoice, Bill of Entry, Supplementary
Invoice
 Xerox not permitted. Endorsed
Invoice/Bill of Entry permissible
 Defect in document – Permission of
AC/DC required to avail Cenvat Credit

Inputs for manufacturer
All goods used in factory by
manufacturer having some relation with
manufacture
 Accessories and warranty spares
supplied along with main final product
 Power generation for captive
consumption
 Goods for providing output service

Inputs for service provider
Definition restricted
 Only inputs used for providing taxable
services eligible
 Consumable eligible
 If property in inputs transferred to buyer
– not eligible for Cenvat

Ineligible Inputs




Goods on which 1%/2% excise duty is paid [proviso to
rule 3(i)
Goods (and services) used for civil construction not
eligible except when used for construction itself
Canteen food (and services), goods for personal not
eligible - hand gloves – Is it ‘personal use or
consumption’ of employee?
Goods having no relation with manufacture – As per
CBE&C circular, even office furniture and stationery is
eligible as input
Reversal of Cenvat if inputs partially or fully
written off
Cenvat credit reversal is required even if
the inputs are written off fully or partially
in books of account (w.e.f. 1-3-2011) [so
far, such reversal was required only if
inputs were completely written off]
 Not applicable when general provision
made in books of account
 Finished goods write off – remission from
Commissioner – reversal of Cenvat

Capital Goods




Capital goods (machinery, plant, spare parts of
machinery, tools, dies, etc. ) as defined in rule 2(a),
used for manufacture of final product and/or used for
providing output taxable service will be available.
Capital goods should be used in the factory. Capital
goods used outside the factory for generation of
electricity for captive use within the factory eligible
50% credit is available in current year and balance in
subsequent financial year or years, except in case of
SSI
Assessee should not claim depreciation on duty
portion on which he has availed Cenvat credit
Capital Goods
Only those defined as capital goods eligible –
check chapter heads
 Steel, cement for construction not eligible
 Spare parts, components, tools covered under
the definition though normally not capitalised in
books of account

Motor vehicles Eligibility to
manufacturers – effective 1-4-2012


Cenvat Credit is allowable on motor vehicles (except
under heading Nos. 8702, 8702, 8704, 8711 and their
chassis) to manufacturers. The excluded chapter heads
are relating to motor vehicles for transport of 10 or more
persons (including driver), motor cars, station wagons,
tor vehicles for transport of goods and motor cycles.
In effect, Cenvat credit is available only in respect of
tractors, special purpose motor vehicles, work trucks,
bicycles, baby carriages and trailers and parts and
accessories of all motor vehicles to the manufacturers,
w.e.f. 1-4-2012.
Cenvat Credit of Motor Vehicles
to Service Providers

Cenvat credit of motor vehicles covered
under headings 8702, 8703, 8704 and
8711 and their chassis is available only
to specified service providers like
courier, renting or hire of motor vehicles,
transportation of passengers, motor
driving training schools, transportation of
inputs and capital goods used for
providing an output service
Removal of capital goods after
use

If capital goods are cleared after use as scrap
or second hand goods, an ‘amount’ payable by
reducing the original Cenvat credit @ 2.5% per
quarter ( [rule 4(5A)] (Higher reduction in case
of computers)
 If excise duty calculated on basis of
transaction value of the old capital goods is
higher, then ‘amount’ equal to that duty
payable.
Ineligible Input Services



Rent-a-cab services, insurance of motor vehicles,
repair of motor vehicles not eligible, except where
motor vehicle is eligible as ‘capital goods’
Architect and Construction services for building, civil
structure, laying of foundation or structures for capital
goods – except when used for construction itself
Canteen, club membership of employees, insurance of
employees, LTA of employees – not eligible
Inclusive part of Input Service


includes services used in relation to –
modernisation, renovation or repairs of a
factory, premises of provider of output service
or an office relating to such factory or
premises, advertisement or sales promotion,
market research, storage upto the place of
removal, procurement of inputs, accounting,
auditing, financing,
 (Continued)
Input Service (Contiued)

recruitment and quality control, coaching
and training, computer networking, credit
rating, share registry, security, business
exhibition, legal services, inward
transportation of inputs or capital goods
and outward transportation upto the
place of removal (The words ‘activities
relating to business such as’ removed in
new definition)
Includes

If the word “include/s “ is used it means that
the definition is not exhaustive but it is
inclusive, i.e. it expands the meaning Doypack Systems (P.) Ltd. v. UOI (1988) 2
SCR 962 = 1988 2 SCC 299 = 65 Comp Cas
1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow
Development Authority v. M K Gupta (1994) 1
SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC
787.
In relation to

The expression ‘in relation to’ (so also
‘pertaining to’) is a very broad expression,
which pre-supposes another subject matter.
These are words of comprehension which
might both have a direct significance as well
as an indirect significance depending on the
context. -. - ‘Relating to’ is equivalent to or
synonymous with as to ‘concerning with’ and
‘pertaining to’. The expression ‘pertaining to’ is
an expression of expansion and not of
contraction
Services in inclusive part of definition
These relate to procurement, marketing,
administration, accounting, raising of
finance, human resources
 All five ‘resources i.e. M’ s – Men,
Material, Machines, Money and Minutes
covered
 Except services specifically excluded, all
other services should get covered

Wasteful Expenditure as per department
for non-eligibility of Cenvat credit
Open society - Building for office or
factory is a waste
 Employees, staff, should travel by public
bus or airplane. Motor vehicle, taxi is
luxury
 Employee benefit is a luxury – employ
only casual labour

Credit on receipt of Invoice
In respect of invoices of service tax, on
or after 1-4-2011, credit can be taken on
receipt of invoice, but if payment is not
made to service provider within 3
months, credit is to be reversed [Rule
4(7) of Cenvat Credit Rules as amended
w.e.f. 1-4-2011]
 In respect of invoices upto 31-3-2011,
earlier provision continues

Zero rated and exempt transactions
Basic principle is that Cenvat credit
available only when tax payable on final
product or output services
 In zero rated transaction, tax not payable
on final product, but Credit of input taxes
is available (e.g. exports)
 In ‘exempted transaction’, tax is not
payable on final product and input credit
is not available

Rule 6 of Cenvat Credit Rules
Rule 6 applies where both exempted
goods and taxable goods are
manufactured or exempted and taxable
services provided
 Payment of ‘amount’ increased to 6% in
case of exempted services w.e.f. 1-42012
 4 options are available to assessee

Four Options


(1) Maintain separate inventory and accounts of
receipt and use of inputs and input services used for
exempted goods/exempted output services – Rule
6(2) of Cenvat Credit Rules
(2) Pay amount equal to 6% of value of exempted
goods (if he is ‘manufacturer) and of value of
exempted services (if he is service provider) – Rule
6(3)(i) as amended w.e.f. 1-4-2012 [The ‘amount’
payable was 5% 31-3-2012]. (Continued)
Four Options (Continued)
(3) Pay an ‘amount’ equal to proportionate
Cenvat credit attributable to exempted final
product/ exempted output services, as
provided in rule 6(3A) – Rule 6(3)(ii) of Cenvat
Credit Rules
 (4) Maintain separate accounts for inputs and
pay ‘amount’ as determined under rule 6(3A)
in respect of input services - Rule 6(3)(iii) of
Cenvat Credit Rules as inserted w.e.f. 1-42011.

Exempted Services w.e.f. 1-42011

“Exempted services” means taxable services which
are exempt from the whole of the service tax leviable
thereon, and includes services on which no service tax
is leviable under section 66 of Finance Act and taxable
services whose part of value is exempted on the
condition that no credit of inputs and input services,
used for providing such taxable service, shall be
taken. Explanation – For removal of doubts, it is
hereby clarified that ‘exempted services’ includes
trading [Words in italics inserted w.e.f. 1-4-2011]
Exempted goods w.e.f. 1-4-2011


As per Rule 2(d) of Cenvat Credit Rules,
'exempted goods' means goods which are
exempt from whole of duty of excise leviable
thereon and includes goods which are
chargeable to 'Nil' rate of duty and the goods
in respect of which the benefit of an exemption
under Notification No. 1/2011-CE dated 1st
March 2011 is availed [The words in italics
have been inserted w.e.f. 1-4-2011].
Provision in case of traded
goods
Difference between sale price and cost
of goods sold is to be treated as value of
exempted service
 Good and sensible provision – should
apply to past also

Exemptions subject to condition of nonavailment of Cenvat Credit
Rule 6(3D) (inserted w.e.f. 1-4-2011)
states that payment of ‘amount’ under
rule 6(3) means Cenvat credit not taken
for purpose of an exemption notification
where exemption is granted on condition
that no Cenvat on input and input
services is availed
 Good provision – even Tribunal had held
so earlier

Value for Services under abatement
scheme
Entire Value will be treated as value of
‘exempted service’ for rule 6
 However, if 6% ‘amount’ is payable, it
will be on amount on which service tax
not paid (e.g. if service tax paid on 33%,
‘amount’ of 6% will be on balance 67%.

Value of service for services under composition
Schemes for rule 6

In case of services covered under composition
scheme, ‘value’ for applying rule 6 will be tax
amount divided by rate of service tax
applicable under general exemption. Present
rate is 12%
 If gross amount Rs. 1,000, service tax paid Rs.
48. Then value of taxable service for rule 6
would be Rs. 400.
 If service tax rate 10% then service tax would
be Rs 400 and vale will be Rs 400.
Overriding Provisions

In respect of banking service, the Bank or
NBFC is required to pay ‘amount’ equal to
50% of Cenvat Credit availed on inputs and
input services [Rule 6(3B) of Cenvat Credit
Rules as inserted w.e.f. 1-4-2011].
No reversal in case of zero rated
transactions
Export of goods and export of services
 Supplies to SEZ, EOU
 Goods supplied against international
competitive bidding, goods supplied to
UN organisations, foreign diplomats
 Provision of services to SEZ (where
exemption is available)

Principle Behind Calculations

Take entire Cenvat credit of inputs and input
services used in exempted as well as taxable final
products and exempted as well as taxable services.
 At the end of month, assessee should
calculate and reverse Cenvat credit
attributable to exempted final products and
exempted services on provisional basis
Rule
6(3A)(b)(i)
Inputs used for exempted final products
Rule
6(3A)(b)(ii)
Inputs used for exempted services (On
proportionate basis, based on ratio of
previous year)
Rule
6(3A)(b)(iii)
Input services used for exempted final
products and exempted services (On
proportionate basis based on ratio of
previous year).
Total
1+2+3 = amount to be reversed every
month on provisional basis
Calculations at the end of the year
Assessee should calculate the ratios on
actual basis and make fresh calculations
and pay difference, if any, before 30th
June.
 If it is found that he had paid excess
amount based on provisional ratio, he
can adjust the difference himself by
taking credit.

Input Service Distributor – Rule 7
HO or Branch or Depot can pass on
credit to factories.
 They have to register, file returns etc.
 Monthly Invoice
 No credit where input service exclusively
for exempted goods or exempted service
 Distribution on turnover basis of previous
month

Refund of Cenvat Credit – Rule 5
Refund of Cenvat credit on proportionate
basis of exports of goods and services
 General Experience is bad – some
excuse is found to reject the refund claim

Removal for job work
Own challan
 Return within 180 days.
 Dutiability of scrap at job worker’s place

Thanks
Thank you very much.
 You are welcome to send queries on
www.taxmann.com/servicetaxqueries.as
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 Your suggestions/feedback welcome.
 Website - http://www.dateyvs.com
