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Cenvat credit on input services and goods

December 17th, 2016

1 Conventional Tax System

In any manufacturing technology, output of one manufacturer becomes input of another. Again even after manufacture is complete, goods pass through various stages like distributor, wholesaler, semi-wholesaler and retailer.

Conventionally, tax is charged based on selling price.

In following chart, A is selling goods to B and B selling to C. Tax rate is 10%.

 

Detail

A

B

C

Purchases

110

165

Value Added

100

40

35

Sub-Total

100

150

200

Add  Tax 10%

10

15

20

Total

110

165

200

It can be seen that B is paying tax on ` 100 on which A has already paid the tax. B is also paying tax on ` 10 which is tax paid by A.

Similarly, C is paying tax on ` 100 on which A and B have already paid the tax.

This is termed as cascading effect. This distorts the tax structure as tax burden depends on number of stages through which goods passes.

End use exemptions cannot be given since even if exemption is granted to C in aforesaid example, the product cannot become tax free as tax borne earlier on those goods cannot be known.

 

2 Tax credit System under VAT

Tax credit system is used to avoid these defects. The purchaser of goods gets Vat credit of tax paid by the earlier seller.

Following chart indicates transaction with Vat and without Vat.

 

 

Transaction without VAT

Transaction With VAT

Details

A

B

A

B

Purchases

110

100

Value Added

100

40

100

40

Subtotal

100

150

100

140

Add Tax

10

15

10

14

Total

110

165

110

154

Here, B has purchased goods from A as usual, but in Vat system, he gets credit (set off) of tax paid by A. Thus, his net purchase price becomes ` 100 only. His value addition is same as earlier i.e. ` 40. He pays tax of ` 14 on ` 140. However, he has got credit of ` 10 (tax paid by A). Hence, effectively, he is paying tax of ` 4 only (i.e. 10% of ` 40 only).

Then it does not matter through how many stages the product passes, since at every stage, tax is paid only on value added and not on entire transaction.

Further, total tax paid on the product is ` 14 out of which ` 10 are paid by A and ` 4 by B. Thus, if exemption is given to B, the product can be made entirely tax free (e.g. for exports or for mass consumption goods or poor man’s needs etc.)

Thus, Vat works on principle of granting credit (set off) of tax paid on input goods, input services and capital goods.

3 Highlights of Cenvat Credit

¨     Cenvat (Central Value Added Tax) Credit is available of excise duty paid on input goods and service tax paid on input services and excise duty paid on capital goods.

¨     Instant Credit i.e. Cenvat credit of excise duty paid on input goods and service tax paid on input services is available immediately on receipt of goods or services without waiting for its consumption.

¨     Cenvat credit of excise duty paid on capital goods is available in two financial years @ 50% each.

¨     Destination principle, – Government really gets tax only when goods are finally consumed. Hence, it is termed as consumption based tax.

¨     One to one co-relation not required. Entire Cenvat of all eligible input goods, input services and capital goods can be utilised for payment of any eligible excise duty on manufactured final product or taxable output services.

¨     Credit of excise duty and service tax  inter-changeable

4 Input Service [Rule 2(i)]

¨     Definition in two parts

¨     First part – used by service provider for providing output service or by manufacturer used directly or indirectly in relation to manufacture

¨     Definition has inclusive and exclusive clauses

5 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 (Continued)

¨     Accounting, auditing, financing, 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.

6 Includes and In relation to

¨     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

¨     The expression ‘in relation to’ is a very broad expression. 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’.

¨     If you are interested in case law in respect of interpretation of these terms, you may post your query on www.taxmann.com/servicetaxqueries.aspx

7 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.

8 Ineligible Input Services

¨     Input Services relating to setting up of original plant or office are not eligible.

¨     Construction and works contract services for building, civil structure, laying of foundation or structures for capital goods – except when used for construction or works contract service itself

¨     Renting of motor vehicle for transport of passengers is not eligible as input service except where motor vehicle is eligible as capital goods

¨     Services of general Insurance, servicing, repair and maintenance of motor vehicle where motor vehicle is not eligible as capital goods

¨     Exception – Motor vehicles manufacturers of vehicles manufactured by them and insurance company of vehicles insured by them can avail Cenvat credit of input services General Insurance, servicing, repair and maintenance of motor vehicle

¨     All employee benefits such as Outdoor catering, beauty treatment, health services, membership of club, life insurance, health insurance, travel benefits, LTA  – – used primarily for personal use or consumption of employee are not eligible.

9 Input Service Distributor – Rule 7

¨     If an assessee has more than one manufacturing plants and/or place of provision of services, he can transfer the Cenvat credit of input services received at Head Office, Branch Offices or Depots to factories and places where service provided.

¨     The HO, branches or depots  have to register under Central Excise as Input Service Distributor (ISD), file returns etc.

¨     They should issue monthly Invoice to distribute credit to factories and/or places of provision of service, on  basis of turnover of previous month/quarter

¨     No credit where input service exclusively for exempted goods or exempted service

¨     If only one factory or place of provision of service, then entire credit can be taken at that place by keeping proper records, without registering as ISD.

¨     Invoice in name of HO or branch legally permissible

10 Inputs (goods) for service provider

¨     Only inputs (goods) used for providing taxable services eligible

¨     Consumable eligible, but LDO, HSD and petrol not eligible

¨     Goods used for generation of electricity or steam for captive use eligible except LDO, HSD and petrol (furnace oil eligible)

11 Inputs (goods) 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

¨     HSD, LDO and petrol not eligible

12 Ineligible Inputs (goods)

¨     LDO, HSD and Petrol not eligible

¨     Goods on which 1%/2% excise duty is paid are not eligible.

¨     Goods (and services) used for civil construction, foundation, structure not eligible  except when used for works contract or construction – but not worth taking Credit

¨     Motor vehicles are not inputs – eligible as capital goods in some cases

¨     Any goods (and services) like food or other items for personal use or consumption of employee not eligible

¨     Goods having no relation with manufacture not eligible

13 Reversal of Cenvat, if inputs partially or fully written off

¨     Cenvat credit reversal is required even if the input goods are written off fully or partially in books of account (if they are slow moving or obsolete).

¨     Not applicable when general provision made in books of account – This is permissible as per Accounting Standards

14 Inputs and Services in Negative List

¨     Building for office or factory

¨     Motor vehicle related services with few exceptions

¨     Employee benefits.

¨     Input services for setting up of plant or office.

15 Removal for job work of inputs by manufacturer

¨     Inputs on which Cenvat credit is availed can be removed for job work and brought back under Cenvat Credit Rule 4(5)(a).

¨     Removal under Own challan

¨     Goods should be returned after job work within 180 days. If not, Cenvat credit on inputs (which were sent for job work) should be reversed.

¨     Dutiability of scrap at job worker’s place – case law that duty liability of scrap is not of Principal Manufacturer but of job worker

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