3 My Introduction V S Datey (Age 69), B Tech (Hons), FCS, FCMA Worked as Finance Manager and Secretary in leading listed companies duringWriting books on indirect taxes and corporate laws and consultancy in indirect taxes since 1994
4 Conventional Tax System DetailABCPurchases-110165Value Added1004035Sub-Total150200Add Tax 10%101520Total
5 Tax credit System under Vat Transaction without VATTransaction With VATDetailsABPurchases-110100Value Added40Subtotal150140Add Tax101514Total165154
6 Highlights Instant Credit One to one co-relation not required in Vat/CenvatCredit of excise duty on inputs and capital goods and service tax on input services.The credit is inter-changeable, except that credit of education cess and SAHE cess for education cess and SAHE cess only
7 Utilisation of Cenvat Credit All taxes and duties specified in rule 3(1) of Cenvat Credit Rules form a ‘pool’. This credit can be utilised by manufacturer of excisable goods or provider of taxable service, for payment of any tax or duty as specified in rule 3(4) of Cenvat Credit RulesOne to one relation not required
8 Eligible duty paying documents Original or Duplicate Invoice, Dealer’s Invoice, Bill of Entry, Supplementary InvoiceXerox not permitted. Endorsed Invoice/Bill of Entry permissibleDefect in document – Permission of AC/DC required to avail Cenvat Credit
9 Inputs for manufacturer All goods used in factory by manufacturer having some relation with manufactureAccessories and warranty spares supplied along with main final productPower generation for captive consumptionGoods for providing output service
10 Inputs for service provider Definition restrictedOnly inputs used for providing taxable services eligibleConsumable eligibleIf property in inputs transferred to buyer – not eligible for Cenvat
11 Ineligible InputsGoods on which 1%/2% excise duty is paid [proviso to rule 3(i)Goods (and services) used for civil construction not eligible except when used for construction itselfCanteen food (and services), goods for personal not eligible - hand gloves – Is it ‘personal use or consumption’ of employee?Goods having no relation with manufacture – As per CBE&C circular, even office furniture and stationery is eligible as input
12 Reversal of Cenvat if inputs partially or fully written off Cenvat credit reversal is required even if the inputs are written off fully or partially in books of account (w.e.f ) [so far, such reversal was required only if inputs were completely written off]Not applicable when general provision made in books of accountFinished goods write off – remission from Commissioner – reversal of Cenvat
13 Capital GoodsCapital goods (machinery, plant, spare parts of machinery, tools, dies, etc. ) as defined in rule 2(a), used for manufacture of final product and/or used for providing output taxable service will be available.Capital goods should be used in the factory. Capital goods used outside the factory for generation of electricity for captive use within the factory eligible50% credit is available in current year and balance in subsequent financial year or years, except in case of SSIAssessee should not claim depreciation on duty portion on which he has availed Cenvat credit
14 Capital GoodsOnly those defined as capital goods eligible – check chapter headsSteel, cement for construction not eligibleSpare parts, components, tools covered under the definition though normally not capitalised in books of account
15 Motor vehicles Eligibility to manufacturers – effective 1-4-2012 Cenvat Credit is allowable on motor vehicles (except under heading Nos. 8702, 8702, 8704, 8711 and their chassis) to manufacturers. The excluded chapter heads are relating to motor vehicles for transport of 10 or more persons (including driver), motor cars, station wagons, tor vehicles for transport of goods and motor cycles.In effect, Cenvat credit is available only in respect of tractors, special purpose motor vehicles, work trucks, bicycles, baby carriages and trailers and parts and accessories of all motor vehicles to the manufacturers, w.e.f
16 Cenvat Credit of Motor Vehicles to Service Providers Cenvat credit of motor vehicles covered under headings 8702, 8703, 8704 and 8711 and their chassis is available only to specified service providers like courier, renting or hire of motor vehicles, transportation of passengers, motor driving training schools, transportation of inputs and capital goods used for providing an output service
17 Removal of capital goods after use If capital goods are cleared after use as scrap or second hand goods, an ‘amount’ payable by reducing the original Cenvat 2.5% per quarter ( [rule 4(5A)] (Higher reduction in case of computers)If excise duty calculated on basis of transaction value of the old capital goods is higher, then ‘amount’ equal to that duty payable.
18 Ineligible Input Services Rent-a-cab services, insurance of motor vehicles, repair of motor vehicles not eligible, except where motor vehicle is eligible as ‘capital goods’Architect and Construction services for building, civil structure, laying of foundation or structures for capital goods – except when used for construction itselfCanteen, club membership of employees, insurance of employees, LTA of employees – not eligible
19 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, accounting, auditing, financing,(Continued)
20 Input Service (Contiued) 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 (The words ‘activities relating to business such as’ removed in new definition)
21 IncludesIf the word “include/s “ is used it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787.
22 In relation toThe expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. 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’. The expression ‘pertaining to’ is an expression of expansion and not of contraction
23 Services in inclusive part of definition These relate to procurement, marketing, administration, accounting, raising of finance, human resourcesAll five ‘resources i.e. M’ s – Men, Material, Machines, Money and Minutes coveredExcept services specifically excluded, all other services should get covered
24 Wasteful Expenditure as per department for non-eligibility of Cenvat credit Open society - Building for office or factory is a wasteEmployees, staff, should travel by public bus or airplane. Motor vehicle, taxi is luxuryEmployee benefit is a luxury – employ only casual labour
25 Credit on receipt of Invoice In respect of invoices of service tax, on or after , credit can be taken on receipt of invoice, but if payment is not made to service provider within 3 months, credit is to be reversed [Rule 4(7) of Cenvat Credit Rules as amended w.e.f ]In respect of invoices upto , earlier provision continues
26 Zero rated and exempt transactions Basic principle is that Cenvat credit available only when tax payable on final product or output servicesIn zero rated transaction, tax not payable on final product, but Credit of input taxes is available (e.g. exports)In ‘exempted transaction’, tax is not payable on final product and input credit is not available
27 Rule 6 of Cenvat Credit Rules Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services providedPayment of ‘amount’ increased to 6% in case of exempted services w.e.f4 options are available to assessee
28 Four Options(1) Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services – Rule 6(2) of Cenvat Credit Rules(2) Pay amount equal to 6% of value of exempted goods (if he is ‘manufacturer) and of value of exempted services (if he is service provider) – Rule 6(3)(i) as amended w.e.f [The ‘amount’ payable was 5% ]. (Continued)
29 Four Options (Continued) (3) 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 - Rule 6(3)(iii) of Cenvat Credit Rules as inserted w.e.f
30 Exempted Services w.e.f. 1-4-2011 “Exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. Explanation – For removal of doubts, it is hereby clarified that ‘exempted services’ includes trading [Words in italics inserted w.e.f ]
31 Exempted goods w.e.fAs per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty and the goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 1st March 2011 is availed [The words in italics have been inserted w.e.f ].
32 Provision in case of traded goods Difference between sale price and cost of goods sold is to be treated as value of exempted serviceGood and sensible provision – should apply to past also
33 Exemptions subject to condition of non-availment of Cenvat Credit Rule 6(3D) (inserted w.e.f ) states that payment of ‘amount’ under rule 6(3) means 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 availedGood provision – even Tribunal had held so earlier
34 Value for Services under abatement scheme Entire Value will be treated as value of ‘exempted service’ for rule 6However, if 6% ‘amount’ is payable, it will be on amount on which service tax not paid (e.g. if service tax paid on 33%, ‘amount’ of 6% will be on balance 67%.
35 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 rate of service tax applicable under general exemption. Present rate is 12%If gross amount Rs. 1,000, service tax paid Rs. 48. Then value of taxable service for rule 6 would be Rs. 400.If service tax rate 10% then service tax would be Rs 400 and vale will be Rs 400.
36 Overriding Provisions In respect of banking service, the Bank or NBFC 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 ].
37 No reversal in case of zero rated transactions Export of goods and export of servicesSupplies to SEZ, EOUGoods supplied against international competitive bidding, goods supplied to UN organisations, foreign diplomatsProvision of services to SEZ (where exemption is available)
38 Principle Behind Calculations 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
39 Inputs used for exempted final products Rule 6(3A)(b)(i)Inputs used for exempted final productsRule 6(3A)(b)(ii)Inputs used for exempted services (On proportionate basis, based on ratio of previous year)Rule 6(3A)(b)(iii)Input services used for exempted final products and exempted services (On proportionate basis based on ratio of previous year).Total1+2+3 = amount to be reversed every month on provisional basis
40 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.If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.
41 Input Service Distributor – Rule 7 HO or Branch or Depot can pass on credit to factories.They have to register, file returns etc.Monthly InvoiceNo credit where input service exclusively for exempted goods or exempted serviceDistribution on turnover basis of previous month
42 Refund of Cenvat Credit – Rule 5 Refund of Cenvat credit on proportionate basis of exports of goods and servicesGeneral Experience is bad – some excuse is found to reject the refund claim
43 Removal for job work Own challan Return within 180 days. Dutiability of scrap at job worker’s place
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