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Cenvat – Exempted goods and services

December 11th, 2016

1 No Cenvat credit if no excise duty or service tax payable on output

¨     Basic principle is that Cenvat credit is available only when excise duty is payable on final product or service tax is payable on output services [Rule 6(1) of Cenvat Credit Rules].

2 Zero rated and exempt transactions

¨     In zero rated transaction, tax not payable on final product, but Credit of input taxes is available (e.g. exports, supplies to SEZ, EOU) – thus indirectly Cenvat credit is available

¨     In ‘exempted transaction’, tax is not payable on final product and input credit is not available

3 Rule 6 of Cenvat Credit Rules

¨     Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services provided

¨     Following 4 options are available to assessee

(1) Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services and take only eligible Cenvat Credit – Rule 6(2) of Cenvat Credit Rules

(2) Take Entire Cenvat Credit and pay amount equal to 6% of value of exempted goods (if he is ‘manufacturer’) and 7% of value of exempted services (if he is service provider) – Rule 6(3)(i) as amended w.e.f. 1-6-2015 [The ‘amount’ payable was 6% on exempted services. Since service tax rate has been increased to 14% w.e.f. 1-6-2015, the ‘amount’ payable has also been increased]

(3) Take Entire Credit and 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

4 Partly separate accounts and partly proportionate basis

¨     Whether partly separate accounts and partly proportionate basis permissible in case of input services i.e. take entire Cenvat credit where direct relation is available and take Cenvat credit on proportionate basis on other cases.

¨     Issue debatable and litigation prone but in my view should be permissible on basis of costing principles, in absence of any specific prohibition in Rules.

5 Option to be informed

¨     Option under rule 6(3) to be informed

¨     Option should be uniformly applied to all exempted goods and services

¨     Option once exercised cannot be changed in remaining part of the financial year

6 Meaning of ‘Exempted Services’ [Rule 2(e)]

¨     Services on which no tax payable

¨     Negative List of Services

¨     Services partially exempt subject to non-availment of Cenvat Credit of inputs and input service [Thus, if credit of inputs or input services is available, it is not ‘exempted service’ for purpose of rule 6]

¨     Trading is exempted service

¨     ‘Exempted Service’ does not include service exported as per rule 6A of Service Tax Rules

7 Exempted goods Rule 2(d)

¨     Goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to ‘Nil’ rate of duty

¨     Goods on which 1%/2% excise duty is paid (as the condition is  Cenvat credit should not be utilised)

8 Capital Goods

¨     Rule 6 does not apply

¨     Credit not available only if entirely used for manufacture or exempted goods and exempted services

¨     Otherwise, entire 100% credit is available, if capital goods are party used for taxable goods or services.

9 Exemptions subject to condition of non-availment of Cenvat Credit

¨     Rule 6(3D) states that payment of ‘amount’ under rule 6(3) [6% or proportionate basis] shall be deemed that  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

10 Calculation of value of exempted service

¨     Specific provisions made in rule 6(3A) in respect of valuation of exempted goods and exempted service

¨     In case of excisable goods, value on basis of section 3, 4 or 4A as applicable

11 Provision in case of traded goods

¨     A manufacturer or service provider may also be engaged in trading of goods [e.g. automobile dealer providing taxable service and also engaged in sale of spare parts or automobiles or manufacturer selling own manufactured goods as well as purchased goods].

¨     Difference between sale price and  cost of goods sold or 10% of cost of goods, whichever is higher, is to be treated as value of exempted service

¨     Cost of goods not to include expenses towards purchase of the goods.

¨     Provision only for rule 6 i.e. no service tax payable on such amount.

12 Value for Services under abatement scheme subject to non-availment of Cenvat

¨     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 40%, ‘amount’ of 6% will be on balance 60%).

¨     If credit of inputs or input services is available, it is not ‘exempted service’ for purpose of rule 6.

13 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 general rate of service tax applicable

¨     If gross amount Rs. 1,000, service tax paid Rs. 48. Then value of taxable service for rule 6 would be Rs. 400.

14 Overriding Provisions

¨     In respect of banking service , the Bank or Financial Institution or NBFC engaged in providing services by way of extending deposits, loans or advances 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 and amended w.e.f. 1-7-2012].

¨     Thus, if Bank, FI or NBFC is not engaged in providing services by way of extending deposits, loans or advances, this provision is not applicable.

¨     No reversal or payment of amount if services provided to SEZ unit or developer [Rule 6(6A)]

15 No reversal in case of zero rated transactions

¨     Export of goods and export of services

¨     Supplies of goods to SEZ, EOU

¨     Goods supplied against international competitive bidding, goods supplied to UN organisations, foreign diplomatic missions.

¨     Provision of services to SEZ (where exemption is available).

¨     In such cases, any reversal or payment of ‘amount’ under rule 6 is not required.

16 Principle Behind Calculations under rule 6

¨     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.

17 Calculation of amount to be reversed on provisional basis

¨     Input goods used for exempted final products (on technical calculations, not on ratio basis)

¨     Input goods used for exempted  services (ratio of previous year)

¨     Input services used for exempted final products and exempted service (on proportionate basis of previous year)

18 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 and inform department

¨     If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

 

 

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