Cenvat Credit Restriction under Rule 6- Confusion Galore
Madhukar N Hiregange, FCA
The credits under central excise and service tax have witnessed a number of changes over the years. First in 2002 Service tax credit was allowed within the service, then within all services and in 2004 across excisable goods and services. Rule 6 which regulates the credits has also been amended often latest in the Finance Act 2008 w.e.f. 1.4.2008. In this article we discuss the present provisions, discussion on the provision. The clarification vide Circular 868 of may 2008 and the issues that has raised and finally the present position of the hapless tax payer.
Statutory Provisions as to Credit
1. The relevant provision of Rule 6 applicable in the context is extracted as under for the ease of understanding
(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely
(a)…
(c) the provider of output service shall utilize credit only to extent of an amount not exceeding twenty per cent of the amount of service tax payable on taxable output service
2. It is very important to note the above extracted sub-rule (3) is amended amend w. e. f from 01.04.2008. The new provision is extracted as under
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-
(i) the manufacturer of goods shall pay an amount equal to ten per cent of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent. of value of the exempted services; or
(ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).
Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.
Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.
(3A) For determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-
(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:-
(i) name, address and registration No. of the manufacturer of goods or provider of output service;
(ii) date from which the option under this clause is exercised or proposed to be exercised;
(iii) description of dutiable goods or taxable services;
(iv) description of exempted goods or exempted services;
(v) CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition;
(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-
(i) the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A;
(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A;
(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;
(c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-
(i) the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H;
(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H;
(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year;
(d) the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid;
(e) the manufacturer of goods or the provider of output service, shall, in addition to the amount short-paid, be liable to pay interest at the rate of twenty-four per cent. per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date;
(f) where the amount determined as per condition (c) is less than the amount determined and paid as per condition (b), the said manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount;
(g) the manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, as per condition (d) and (f) respectively, the following particulars, namely:-
(i) details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally as per condition (b),
(ii) CENVAT credit attributable to exempted goods and exempted services for the whole financial year, determined as per condition (c),
(iii) amount short paid determined as per condition (d), alongwith the date of payment of the amount short-paid,
(iv) interest payable and paid, if any, on the amount short-paid, determined as per condition (e), and
(v) credit taken on account of excess payment, if any, determined as per condition (f);
(h) where the amount equivalent to CENVAT credit attributable to exempted goods or exempted services cannot be determined provisionally, as prescribed in condition (b), due to reasons that no dutiable goods were manufactured and no taxable service was provided in the preceding financial year, then the manufacturer of goods or the provider of output service is not required to determine and pay such amount provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in condition (C) and pay the amount so calculated on or before 30th June of the succeeding financial year.
(i) where the amount determined under condition (h) is not paid within the said due date, i.e., the 30th June, the manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest at the rate of twenty four per cent. per annum from the due date till the date of payment.
Explanation I.- "Value" for the purpose of sub-rules (3) and (3A) shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made thereunder.
Explanation II.-The amount mentioned in sub-rules (3) and (3A), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.
Explanation III.- If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rule (3) or as the case may be sub-rule (3A), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken
3. Hence from all the above deduction the following options are available upto 31.03.2008:
a. Maintain separate accounts for taxable and exempted service and avail the credit attributable to taxable service
b. Restrict the credit upto 20% on the tax payable on the taxable service
Discussion on the issue:
1. Initially Cenvat Credit Rules 2002 governed the Cenvat credit provisions to manufacturers and Service Tax Credit Rules 2002 governed the Cenvat Credit provisions to Service providers, it was from 10.09.2004, wherein the cross sectional credits was allowed.
2. Under the Cenvat Credit Rules 2004 which was made effective from 10.09.2004 wherein the manufacturer would be eligible to avail the credit on input services subject to Cenvat Credit Rules 2004 and the service provider would be eligible to avail the credit on both inputs and input services subject to satisfying the requirements under Cenvat Credit Rules 2004.
3. First we have to analyze whether the credit is eligible under rule 3(1) of Cenvat Credit Rules 2004 and the next step is to ascertain the manner of utilization of such credit, whether satisfies rule 3 of Cenvat Credit Rules 2004.
4. If we analyze the provisions of rule 3, there is no requirement as to one to one correlation between the input service and output service.
5. The next question to look at is whether the service provider is providing both taxable and non taxable/exempted service. If the service provider is providing both taxable and non taxable/exempted service then provisions of rule 6 of the Cenvat Credit rules 2004 has to be followed.
6. The option available to the service provider providing both taxable and non taxable/exempted services are:
a. Maintain separate records for inputs, input services for receipt, consumption of inventory used for taxable and non taxable / exempted service.
b. Pay an amount equivalent to 8% on the value of exempted/ non taxable service.
c. Payment / reversal of credit attributable to exempted service computed as per the formula provided.
7. In the second option the provision is to reverse the CENVAT credit provisionally based on the previous year ratio and adjust the same to the actual for the financial year by 30th June of the next year.
- Before exercising the option, the service provider shall intimate the following to the Superintendent of Central Excise:
i. Name, address and registration number of manufacturer of goods or provider of output service;
ii. Date from which option under this clause shall be exercised or proposed to be exercised.
iii. Description of services provided (taxable and nontaxable/ exempted)
iv. Particulars of Cenvat Credit of inputs and input services in the books on the date of exercising the option.
- Credit on inputs or input services used exclusively for providing exempted services/ non taxable services, then such credits would not be available.
- The amount of Cenvat credit attributable to inputs used for provision of exempted services shall be determined using the formula given below
Value of exempted services provided during preceding year
Aggregate of total Value of taxable services provided and total value of exempted services provided during the preceding financial year
The above ratio is multiplied by Cenvat Credit taken on inputs during the month.
- The amount attributable to input services used for providing exempted services is arrived by following the following formula
Value of exempted services provided during preceding year
Aggregate of total Value of taxable services provided and total value of exempted services provided during the preceding financial year
The above ratio is multiplied by Cenvat Credit taken on input services during the month.
- The service provider would be required to ascertain the amount of credit attributable to exempted services for the entire year in the manner provided:
i. Initially determining the Cenvat credit attributable to inputs used for provision of exempted services for the entire financial year and is arrived by following the following formula
Total Value of exempted services provided during the financial year
Aggregate of total value of taxable services plus exempted services provided during the financial year
The above ratio is multiplied by inputs availed during the financial year.
ii. Next is to determine the amount attributable to input services used for providing exempted services and is arrived by adopting the following formula
Total Value of exempted services provided during the financial year
Aggregate of total value of taxable services plus exempted services provided during the financial year
The above ratio is multiplied by input services availed during the financial year.
- The service provider shall ascertain the differences between the amounts calculated for whole year and amount calculated provisionally on monthly basis.
- The amount so determined if payable by the service provider shall be paid within the notified date i.e. 30th June of succeeding financial year and if default is made in paying the difference within the due date then the service provider shall be liable to pay interest at the rate of 24% p.a.
- In case, the amount determined and paid on monthly basis is more than the amount for the financial year, the difference amount shall be allowed to be adjusted against the service tax liability.
- The service provider shall intimate such adjustment within 15 days of adjustment to the Superintendent of Central Excise.
§ Details of Cenvat Credit attributable to exempted services on monthly basis, for the whole year, determined provisionally (monthly basis).
§ Details of Cenvat Credit attributable to exempted services for the whole financial year, determined provisionally on yearly basis.
§ Amount short paid if any along with the date of payment of the amount short paid.
§ Interest payable and paid if any on amount short paid
§ Credit taken if any on account of excess payment.
- In case the service provider does not have any exempted services which were provided during the preceding financial year and the Cenvat attributable to exempted services on monthly basis, then the service provider need not determine such amount on monthly basis. Such determination can be done for the whole financial year and amount calculated shall be paid within 30th June.
8. We see there is a problem in drafting the formula in the last case given above the same may be rectified by the department soon. However in either of the options the service provider is eligible to use the whole of the credit for the 16 services specified as under:
|
Consulting Engineering services
|
Insurance auxiliary services
|
Intellectual property Rights services
|
|
Commercial and industrial Construction services
|
Forex Broking Services
|
Technical Inspection and Certification Services
|
|
Technical Testing and Analysis Service
|
Management, Maintenance and Repair Service
|
Commissioning erection and Installation agency service
|
|
Banking and Financial Services
|
Scientific and Technical Consultancy services
|
Security Agencies
|
|
Real Estate service
|
Management Consultant Services
|
Architect
|
|
Interior Decorator services
|
|
|
Circular 868 dt. 9.6.2008
This circular clarifies the following:
1. Inputs or input services used exclusively in the manufacture of exempted goods or exempted services not eligible: What about inputs/ input services used exclusively in taxable services and dutiable goods?.
2. The option chosen should be the one for the financial year and once opted in cannot be opted out: Difficult to implement in business.
3. The value is in terms of section 4/ 4A/ 3 (2). Welcome.
4. Accounting code: No comments.
5. Whether ISD can opt for the same: No Comments
6. Export of services not treated as exempted- Welcome.
7. Method of determining credit of inputs used in relation to manufacture of exempted goods: On basis of actual consumption ( stores/ production records) the percentage can be determined. At end of the year certificate from cost accountant/ CA giving details and credit attributable of inputs used in exempted products is to be provided.
8. 16 specified common services not taken into determination under Rule 6 (3). No comments.
Issues with Comments which have still to be addressed:
1. It should be clarified that inputs and input services used in dutiable and taxable services exclusively are allowed fully and not a subject matter of Rule 6 (3). Would be fair as exempted inputs / services excluded.
2. Normally choice of options should be based on the contracts as customers also use credits while negotiating. Contracts spill over period to period. If the assessee can keep complicated accounts why not?
3. The cure appears to be worse that the disease. Provisions were bought into effect from 1.4.2008 -90% of the assessees would not even be aware of the same even today 2 months into the compliance, even the tax compliant ones. Many would opt say in September of 2008 we.f. 1.4.2008. Some would opt in from September itself. What would happen due to this timing difference.
4. The accumulated credit from the previous years ( unutilized after debiting 20% of the tax payable) appears to be available.
5. Further next year changing the option what would happen with the accumulated credits if any .
6. The need for intimating the option itself to the department in this time of faith in assessees is not necessary and is to be done away with.
7. Formulae depends on the previous year figures. How can this be applied. Would it be on provisional figures of audited financials. If on audited financials when would that be available.
8. No clarification on when no previous year available.
9. Some meticulous assessees would like to calculate on actual basis month on month no option for them.
10. Certification - Major worry is that figure already availed maybe insisted on for certification. Whether there would be undue pressure to sign?
11. Whether in multi product company with sales to exempted sectors ( Defense, R &D etc) the cost / chartered accountant would be aware of what is exempted and what is not?
12. Whether accurate BOM or consumption records would be available?
13. End of the year means when at the time of audit or on 31st March?
Real Practical Challenge for the Credit Availers:
1. Identify the credit attributable to inputs used for goods and services ( Special additional duty of customs available only for goods)
2. Identify the input services used
3. Identifying the exempted services/ goods
4. Identifying the exempted recipient/ entity
5. Identifying the inputs used exclusively in manufacture of exempted goods/ services.
6. Identifying the inputs used exclusively in manufacture of taxable / dutiable services/ goods.
7. Identifying the input services used exclusively in manufacture of exempted goods/ services.
8. Identifying the input services used exclusively in manufacture of taxable / dutiable services/ goods.
9. Identifying the inputs used exclusively in manufacture of exempted goods exported/ to 100% EOU / SEZ.
10. Identifying the inputs used exclusively in taxable services exported. ( please note here 100% EOU and SEZ are not involved)
11. Identify the 16 inputs services commonly used to provide both exempted/ taxable services/ goods.
Now we are ready to apply the formulae for the month based on the past years record.
This exercise has to be done monthly!!! The matter of services used in trading whether taxable or non taxable service is one which is not taken care above.
Is this possible without difference of opinion at all? I leave that to the readers. CAG and IAP would have a field day in interpreting this rule.
These are some of the issues which came to my mind when I was examining the same today. It appears to be well nigh impossible for multi product/ service company unless it has a special software program written for the same.
CAclubindia
