CENVAT Credit is the credit allowed on the
tax paid on input services and capital goods. When a manufacturer purchases
inputs to manufacture goods he pays tax on those. On selling the same goods he
pays tax again. The system of CENVAT Credit ensures that one is not taxed twice
for the same product. The amount paid initially may be adjusted while paying
taxes for the finished goods. Credit can be utilised for input services
utilised and also capital goods.
One of the major changes includes the
changing of the definition of ‘input’ in Rule 2(k). Inputs now mean all goods
used in the factory by the manufacturer of the final product barring goods
specified in the negative list and goods having no connection whatsoever in the
manufacture of the final product. Moreover, goods which are cleared with
the final product as accessories and the goods used for providing free warranty
are also included in the broadened definition of inputs. Goods used for
generation of electricity constitute inputs, however, goods used for
construction of a building or a civil structure for capital goods has been
excluded. Goods primarily for personal consumption (food etc.) have been
excluded too.
The definition of input services makes a
distinction between the two heads mentioned below. Goods used for construction
purposes or motor vehicles have been excluded from the definition of inputs,
however, construction services is a part of input services. With respect to “input services”, the scope has been
narrowed by removing the expression “activities related to business” from the
inclusive part of the definition.
In essence the budget has restricted the
definition of inputs on which CENVAT Credit can be availed. It removed the
expression, “goods used in or in relation to the
manufacture of final products whether directly or indirectly and whether
contained in the final product or not”
There has been no
material alteration in the definition of capital goods. CENVAT Credit of duty
paid on capital goods used outside the factory in order to generate electricity
for in-house consumption has been permitted. An explanation has also been
inserted that ‘exempted services’ would also include trading activities. Thus
it can be inferred that credits cannot be availed on input services pertaining
to trading operations.
Ship breaking is
understood as a process of manufacture according to the Central Excise Tariff.
While breaking ships articles such as kitchen equipment, air conditioners,
furniture etc are generated and usually sold as second hand goods thereafter.
However, no excise duty is paid on them and they don’t emerge from a
manufacturing process thereof. Ship breaking agencies however are entitled to
avail full credit of additional duty of customs paid on the ship when it has
been imported for breaking. This has led to the rampant misuse of the CENVAT Credit
Scheme. Rule 3 of the CCR has been amended laying down that CENVAT Credit shall
not be allowed in excess of 85% of the additional duty paid on ships etc
imported for the purpose of ship breaking.
Rule 5(B) has been
amended which requires a manufacturer (also a service provider) to pay a total
amount which is equal to the CENVAT Credit taken in respect of inputs or
capital goods even where the value of these inputs or capital goods is written
off partially before being used. Before the amendment it was required only when
the value is written off fully.
Rule 6(5) has been
deleted. Thus these services mentioned in the Rule will now be treated as any
other and be subject to the revised provisions. They require the maintenance of
separate accounts for receipt consumption and inventory of inputs.
In case separate accounts
cannot be maintained, the following options are available:-
- Payment of 5 per cent, as against the earlier 6
per cent, on the value of exempted goods and services.
- Payment of a provisional amount followed by
payment of a finally determined amount of credit attributable to input and
input services used in relation to exempted goods.
Banking and life
insurance companies will not however be able to avail the above mentioned
options. These entities will be required to pay a blanket amount equalling 50%
and 20% respectively of all the credits availed on inputs.
Service providers
rendering services to SEZ units or developers, in some specified circumstances
they will neither be required to charge service tax on such services nor will
they be required to reverse proportionate input tax credits. The Credit Rules
have also been amended to require reversal of the CENVAT credit on inputs or
capital goods, even where their value is partially written off in the books
before their being put to use.
This amendment is
prospective in nature and not retrospective.
[By Samkit Sethia (2nd year,
NUJS)]
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