Workshop on Service Tax Session XIV CENVAT CREDIT S. Vasudevan, Advocate

Coverage  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 Concepts  Tax on Value Addition  Aim  To reduce cascading effect of tax/duty  Step towards integration of goods and service tax  Manufacturer & Service provider

Basic Concepts  Goods  Gets manufactured / produced by manufacturers  Used by manufacturers and service providers In the course of / for the purpose of manufacturing or for providing the service  End result is the new final product or the service  End product (goods/service) is subject to excise duty/service tax, as the case may be  This leads to tax/duty on duty

Basic Concepts  Service  Provided by service provider  Used by manufacturers and service providers In the course of / for the purpose of manufacturing or for providing the service  End result is the new final product or the service  End product (goods/service) is subject to excise duty/service tax, as the case may be  This leads to tax/duty on duty

CENVAT CREDIT RULES, 2004  Single rule to cover both central excise and service tax  Notified on  Credit available for  Inputs  Capital goods  Input service  For manufacturer and provider of output service

Capital 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-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-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 : Means  All goods used for providing output service

Inputs : 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 : 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 FactoryTo 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

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

ExcludesTo be treated as input Status under old Rule Result LSD, HSD, motor spirit (petrol) Status Quo No Change Capital GoodsWhen used as parts or components No such exclusion No credit on goods specifically covered under capital goods Summary: Inputs-New vs. Old  Exclusions

Excludes Status under old Rule Change Motor Vehicles No 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. 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 Available Not available 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  Expression deleted “activities relating to business”  excluded to overcome High Court judgments in case of Coca-Cola and Ultra Tech Cement

Input 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 Services  Credit of the following services?  Audit  Tax consultancy  Certification by Cost Accountant  Insurance of office equipments  Travel agents  IT support

Input Services  Now specifically includes  Business exhibition  Legal services  Services specifically excluded but received before  Outdoor caterer service for period upto

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 Available Not available Inputs: Construction

Issue  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 Available Not available Input 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?  Input Service  Invoices raised on or after  On or after the day on which invoice is received  Invoices raised before  On or after the day on which payment is made  Synchronized with Point of Taxation Rules

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  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) 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 option

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)

Example TurnoverValue Taxable Goods 5,00,0005,00,000 Exempted Goods3,00,000 3,00,000 Exempted Services2,50,000 2,50,000 Taxable Services1,50,000 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 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 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  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  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 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 RECEIVES INVOICES TOWARDS PURCHASES OF INPUT SERVICES AN OFFICE OF THE MANUFACTURE R 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 MANUFACTURE R OR PRODUCER OR PROVIDER

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… PROCEDURAL REQUIREMENTS  REGISTRATION  ISSUE OF INVOICE / BILL / CHALLAN  FILING RETURNS  MAINTENANCE OF RECORDS

DISTRIBUTION OF CREDIT OF INPUTS  Rule 7A  Service provider  First stage dealer/Second stage dealer

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