Workshop on Service Tax

Session XIV

CENVAT CREDIT

S. Vasudevan, Advocate

CoverageCoverage

Concept of Cenvat Credit

Scope: Capital Goods, Inputs & Input Services

Rule 4(7): When credit can be availed?

Rule 6(3) and (3A): Taxable and Exempted

Services

Input Service Distributor

Basic ConceptsBasic Concepts

Tax on Value Addition

Aim To reduce cascading effect of tax/duty Step towards integration of goods and

service tax

Manufacturer & Service provider

•

CENVAT CREDIT RULES, 2004CENVAT CREDIT RULES, 2004

Single rule to cover both central excise and service tax

Notified on 10.9.2004 Credit available for

Inputs Capital goods Input service

For manufacturer and provider of output service

Capital Goods-ICapital Goods-I

Specified Goods Chapter 82, 84, 85, 90, etc. Pollution Control Equipments Components, spares and accessories of the

above goods Moulds and dies, jigs and fixtures Refractories and refractory materials Tubes and pipes and fittings thereof Storage Tank

Used for providing output service

Capital Goods-IICapital Goods-II

Motor Vehicles Registered in the name of output service

provider Used for specified output services

Courier Tour Operator Rent-a-Cab Operator Cargo Handling GTA Outdoor Caterer Pandal Shamiana

Capital Goods-IIICapital Goods-III

Dumpers or Tippers (Chapter 87) Registered in the name of output service

provider Used for specified output services

Site formation and Clearance Mining

New Definition: Inputs

Inputs : MeansInputs : Means

All goods used for providing output

service

Inputs : ExcludesInputs : Excludes

LSD, HSD or motor spirit (petrol)

Goods used for construction (discussed in detail later)

Capital goods except when used as parts or components

Motor Vehicles

Inputs : ExcludesInputs : Excludes

Any goods such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee

Includes goods

Condition Status under old Rule Result

Used in Factory To have relationship (whatsoever) with manufacture

Used in or in relation to

Scope expanded -some nexus is

sufficient

Any goods including accessories cleared alongwith final product

Value included in final product

Only included accessories

Credit not restricted to accessories

Summary: Inputs-New vs. Old

Summary: Inputs-New vs. Old

Includes goods

Condition Status under old Rule Result

Cleared for providing free warranty

Value to be included in the price of final product and not to be charged separately: Rule 3(5) amended

Credit to be reversed No credit to be

reversed

Summary: Inputs-New vs. Old

Summary: Inputs-New vs. Old

Excludes To be treated as

input

Status under old Rule Result

LSD, HSD, motor spirit (petrol)

Status Quo No Change

Capital Goods When used as parts or components

No such exclusion

No credit on goods

specifically covered under capital goods

Summary: Inputs-New vs. Old

Summary: Inputs-New vs. Old

Exclusions

ExclusionsExcludes Status under

old Rule Change

Motor VehiclesNo such

exclusion No credit on motor vehicles

Goods used primarily for personal use or consumption of any employee

No such exclusion but

credit not available

No Change

Inputs: New vs. OldInputs: New vs. Old

New Definition: Input Services

Credit on following services relating to motor vehicle

Taxable output service of courier agency, tour operator, rent-a –cab, cargo handling, goods transport agency outdoor catering and pandal or shamiana contractor

Rest (manufacturer or other service provider)

•General Insurance

•Rent-a- Cab

•Authorized Service Station

•Supply of tangible goods

AvailableNot available

Input Services- Specific exclusions

Input Services- Specific exclusions

Input Services- Specific Exclusions

Input Services- Specific Exclusions

Credit not available on service used primarily for personal use or consumption of employees

Outdoor catering

Beauty treatment

Health Services

Cosmetic and plastic surgery

Membership of a club

Health and Fitness Centre

Life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession

Input Services : Expression Deleted

Input Services : Expression Deleted

Expression deleted “activities relating to business”

excluded to overcome High Court judgments in case of Coca-Cola and Ultra Tech Cement

Input ServicesInput Services

Test of commercial expediency Credit of the following services?

Telephone Courier of documents Photocopier Services Lease of office equipments Repair and Maintenance of office

equipments

Input ServicesInput Services

Credit of the following services? Audit

Tax consultancy

Certification by Cost Accountant Insurance of office equipments Travel agents IT support

Input ServicesInput Services

Now specifically includes

Business exhibition

Legal services

Services specifically excluded but received before

01.04.2011

Outdoor caterer service for period upto 31.3.2011

Construction: Inputs and Input

Services

Credit on goods used for Taxable output service of

•Port service,

•Other port

• Airport service,

• Commercial or industrial construction,

• Construction of commercial complex

• Works contract service

Rest (manufacturer or other service provider)

•Construction of a building or a civil structure or a part thereof; or

•Laying of foundation or making of structures for support of capital goods

AvailableNot available

Inputs: ConstructionInputs: Construction

IssueIssue

Renting of immovable property- Credit on cement and steel?

Credit on tower/shelter??

Credit on-•Architect Service•Port service•Other port•Airport service •Industrial or commercial construction•Construction for commercial complex•Works contract

Taxable output service of

•Architect Service•Port service•Other port•Airport service•Industrial or commercial construction•Construction for commercial complex•Works contract

Rest (manufacturer or other service provider)

•Construction of a building or a civil structure or a part thereof; or

•Laying of foundation or making of structures for support of capital goods

AvailableNot available

Input Services: Construction

Input Services: Construction

Input Services : ConstructionInput Services : Construction

Expression deleted: Services used in relation to setting up of a factory, premises of provider of output service or an office relating to such factory or premises

Still includes renovation/ modernization/ repair

Issues

Can renovation / modernization/ repair result in construction of building?

Constructing another building in existing factory?

Rule 4(7) : When credit can be availed?

Rule 4(7) : When credit can be availed?

Input Service

Invoices raised on or after 1.4.2011 On or after the day on which invoice is received

Invoices raised before 1.4.2011 On or after the day on which payment is made

Synchronized with Point of Taxation Rules

Rule 4(7) : When credit can be availed?

Rule 4(7) : When credit can be availed?

If payment not made within 3 months of invoice Amount equal to Cenvat credit to be paid

Credit can be taken again once payment is made

Refund or Credit note Amount equal to Cenvat credit to be paid

Reverse Charge Date on which payment is made of the value and

service tax

Implications under Rule 6

Rule 6 Rule 6

Definition of “Exempted Services” Services exempt from whole of service tax

Services on which no service tax is leviable

Services whose part of value is exempt subject to non-availment of credit on inputs and input services

Trading

New Rule Old Rule

Pay 5% Pay 5% on exempted goods/ Pay 6% on exempted services

Proportionate Credit reversal under Rule 6(3A)

Proportionate Credit reversal under Rule 6(3A)

Maintain separate accounts for inputs & pro-rata credit reversal on input services under Rule 6(3A)

Maintain separate accounts for inputs and input services

Change in optionChange in option

Trading is exempted service now

Trading is exempted service now

Orion Appliances (Tri-Ahd) – Trading is not exempted service: Rule 6 not applicable

Credit scheme for manufacturer & service provider, trader was not covered earlier also

Options available:-• Pay 5% on profit margin

• Maintain separate accounts for inputs & pro-rata credit reversal on input services under Rule 6(3A)

ExampleExample

Turnover Value

Taxable Goods 5,00,000 5,00,000

Exempted Goods 3,00,000 3,00,000

Exempted Services 2,50,000 2,50,000

Taxable Services 1,50,000 1,50,000

Trading (Purchase)

(purchase price = Rs. 20,000) 50,000 30,000

Trading (Job-work)

(RM cost = Rs. 50,000

Conversion charges = Rs. 30,000) 1,00,000 20,000

13,50,000 12,50,000

Input Service Credit = Rs. 1,00,000

Reversal under Rule 6(3A) = 1,00,000 * 3,00,000+2,50,000+30,000+20,000

12,50,000

= Rs. 48,000

Rule 6(5) : No moreRule 6(5) : No more

Rule 6(5) Omitted : 17 services of capital nature were granted full credit even if partially used for exempted goods

Rule 6(5) was similar to Rule 6(4) for capital

goods – Rule 6(4) still exists

Services of enduring nature

Rule 6(6A) : Service to SEZ

Rule 6(6A) : Service to SEZ

Rule 6 not applicable to services provided to a Unit in a SEZ or to a Developer of a SEZ

Full credit on inputs, inputs services and capital goods

Services exempt subject to non-availment of credit

Services exempt subject to non-availment of credit

If part of value of service exempted subject to non-availment of Cenvat

5% of value of exempted portion; or

Proportionate reversal

Services exempt subject to non-availment of credit

Services exempt subject to non-availment of credit

If service tax paid at reduced rate under Rule 6(7), Rule 6(7B) or 6(7C) or under composition scheme for WCT,

Value = Service tax paid under the option

Rate of service tax under Section 66

Eg : Service tax paid under WCT =

Rs. 10,00,000 (gross amount) x 4% = Rs. 40,000

Value for the purpose of Rule 6 =

Rs. 40,000/10% = Rs. 4,00,000

Specific Service ProvidersSpecific Service Providers

Provider of banking & other financial services –

pay 50% of credit availed on inputs & input services.

Provider of life insurance services –

pay 20% of credit availed on inputs & input services.

INPUT SERVICE DISTRIBUTOR

INPUT SERVICE DISTRIBUTOR

RECEIVES

INVOICES

TOWARDS

PURCHASES

OF INPUT

SERVICES

AN OFFICE OF THE MANUFACTURER OR PRODUCER OF FINAL PRODUCTS OR PROVIDER OF OUTPUT SERVICE

ISSUES INVOICE/BILL/ CHALLAN FOR THE PURPOSES OF DISTRIBUTING THE CREDIT OF SERVICE TAX PAID

TO SUCH MANUFACTURER OR PRODUCER OR PROVIDER

ISD - CREDIT DISTRIBUTION ISD - CREDIT DISTRIBUTION

CREDIT DISTRIBUTION

TO ITS MANUFACTURING UNITS OR UNITS

PROVIDING OUTPUT SERVICE

CREDIT DISTRIBUTED NOT TO EXCEED THE

TOTAL SERVICE TAX PAID ON AN INVOICE

NOT TO DISTRIBUTE

• ATTRIBUTABLE TO SERVICE USED IN AN UNIT

EXCLUSIVELY ENGAGED IN MANUFACTURE OF

EXEMPTED GOODS OR PROVIDING OF EXEMPTED

SERVICES

ISD…ISD…

PROCEDURAL

REQUIREMENTS

REGISTRATION

ISSUE OF INVOICE / BILL / CHALLAN

FILING RETURNS

MAINTENANCE OF RECORDS

DISTRIBUTION OF CREDIT OF INPUTS DISTRIBUTION OF

CREDIT OF INPUTS

Rule 7A

Service provider

First stage dealer/Second stage dealer

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Thank You

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