THUMB RULE to avail CENVAT Credit is that it can be availed on those eligible Inputs, Capital goods or Input Services which have been utilized for providing taxable services or manufacturing dutiable goods except the cases where it is restricted under any notification. Therefore, a person engaged in rendering exempted services or manufacturing exempted goods shall not be allowed to avail any amount of CENVAT Credit. However, CENVAT Credit shall not be denied on:
- Capital goods to SSI units availing exemptions based on the value of clearance.
- Inputs used in the manufacture of goods cleared without payment of duty to a job worker referred to in rule 12AA of the Central Excise Rules, 2002.
In case a person is engaged in providing Taxable & Exempted service or Manufacturing Dutiable or Exempted goods together then CENVAT Credit on inputs or input services used shall be availed the manner given in Rule 6 of CCR, 2004.
Before moving towards the answer of this question, we need to understand the meaning of Exempted Goods & Exempted Services as provided in Cenvat Credit Rules, 2004.
Rule 2(d): “Exempted Goods” means excisable goods:
a. which are exempt from the whole of the duty of excise leviable thereon; or
b. which are chargeable to “Nil” rate of duty; and
c. in respect of which the benefit of an exemption under Notification No. 1/2011-C.E., dated the 1st March, 2011 or under entries at serial numbers 67 and 128 of Notification No. 12/2012-C.E., dated the 17th March, 2012 is availed.
Following three types of Goods are covered in the aforesaid definition:
1. Excisable goods which are exempt from whole of the duty under any exemption notification, which would otherwise be dutiable. But it does not include those goods which are not excisable at all i.e. not listed in Central Excise Tariff Act, 1958
2. Excisable goods on which duty is charged at the NIL rate i.e. No Excise Duty is payable on such goods though mentioned in CETA.
3. Excisable goods on which duty is reduced to 1% with a condition that CENVAT Credit on inputs or input services was not availed under N. No. 1/2011-C.E., dated 1st March, 2011 or under entries at serial numbers 67 and 128 of Notification No. 12/2012-C.E., dated 17th March, 2012.
Rule 2(e): “Exempted Service” means a -
a. Taxable service which is exempt from the whole of the service tax leviable thereon; or
b. Service, on which no service tax is leviable under section 66B of the Finance Act; and
c. Taxable service 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;
but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.
Following three types of Services are covered in the aforesaid definition:
1. Any taxable service which is exempt from whole of the service tax by way of exemption notification which would otherwise be taxable. But if any activity is not a “Service” as per section 65(44) of the Act then it can not be termed as Exempted Service like a transaction in money only.
2. Services which are listed in section 66D of the Act as Negative List of services on which no service tax is levied under section 66B of the Act shall be treated as exempted service.
3. Services where part of it has been exempted by way of abatement with a condition that no CENVAT Credit shall be availed on input and input services used in providing such services. However, it will not cover those services where abatement benefit is available without any condition or a condition which restrict availment of CENVAT credit of either inputs or input services. For example, service tax is being levied on 30% of the Total Value of service of construction of commercial complex where money was received from customers before receipt of completion certificate from competent authority. Under this category, abatement benefit is available with a condition that no CENVAT Credit shall be available on inputs used in providing output services. Here, CENVAT Credit on input services can be availed and thus this service can not be categorised as exempted services.
Further, it has specifically been mentioned in this definition that it shall not include the services which are exported. Most of the time it is misunderstood that export will also be considered as exempted service for the purpose of this Rule but it has been clarified now within the definition itself.
If a person is engaged in manufacturing dutiable & exempted goods or rendering taxable & exempted services together then he has to determine and avail CENVAT Credit only on those inputs or input services which are used for providing taxable services or manufacturing dutiable goods.
In such cases there can be two following situations:
1. Inputs or Input Services exclusively used for exempted goods or services then no CENVAT Credit shall be allowed on such items.
2. Common input or input services have been used for both taxable and exempted output then it would be difficult for the assessee to identify the amount of CENVAT Credit that has been used for taxable output only. For such cases, law provides three rules to determine correct amount of CENVAT Credit eligible for utilization.
Three Rules CENVAT Credit
If any person is engaged in manufacturing exempted goods or rendering exempted services along with the taxable service or goods then assessee has to determine the amount of CENVAT Credit utilized for taxable goods or services. There are three options available under the following rules to do so:
A) Rule 6(2) of CCR, 2004
The manufacturer or provider of output service for availing CENVAT Credit shall maintain separate accounts for the receipt, consumption and inventory of inputs & use of input services used:
(i) in or in relation to the manufacture of exempted goods;
(ii) in or in relation to manufacture of dutiable final products excluding exempted goods;
(iii) for the provision of exempted services;
(iv) for the provision of output services excluding exempted services.
and shall take CENVAT credit only on inputs & input services under clauses (ii) and (iv).
B) Rule 6(3)(i) of CCR, 2004
The manufacturer of goods or the provider of output service shall pay an amount equal to six per cent of value of the exempted goods and exempted services. In case of services by way of transportation of goods or passengers by rail, the service provider shall pay only two per cent on the value of service so exempted.
The amount paid under this rule shall be deemed to be CENVAT credit not taken for the purpose of exemption notification where part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs or input services shall be taken. In such cases, 6% shall be paid on the value so exempted under the notification.
C) Rule 6(3A) of CCR, 2004
Under this rule, an assessee shall reverse or pay the proportional amount of CENVAT credit availed, every month on provisional basis, which will be considered as utilized for the provision or manufacture of exempted service or goods respectively. Such reversal or payment shall be made by 5th of the following month or quarter as the case may be. Following formula has been prescribed for computing such amount under this rule:
Cenvat Credit* taken in a month x Value of Exempted Service or Goods manufactured or removed during the preceding financial year
Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the preceding financial year.
The amount computed would be the provisional amount of CENVAT Credit which shall be paid in cash or through CENVAT Credit account for all the 12 months. At the end of the financial year, the assessee shall re-compute the amount of CENVAT Credit required to be reversed or paid under this Rule for the current financial year based on the current year’s values of goods & services. Given below is the formula:
Cenvat Credit* taken in the year x Value of Exempted Service or Goods manufactured or removed during the current year
Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the current year
* Cenvat Credit amount shall be excluded of the value of inputs used in or in relation of manufacture of exempted goods.
This amount is the actual amount of CENVAT Credit which was supposed to be reversed or paid on account of credit availed for providing exempted services or manufacturing exempted goods.
The assessee shall compute the difference between the provisional and the actual amount of CENVAT as computed of CENVAT reversal. In case, the amount reversed by the assessee during the Financial Year falls short of the actual amount of CENVAT Credit then he shall have to pay the balance amount by 30th June of next Financial Year. Interest @24% p.a. will be levied if payment is delayed. In case excess CENVAT Credit was reversed during the year then he will be allowed to take it back by way of debiting its CENVAT Credit balance.
# In case there were no output services rendered or no goods were manufactured by the assessee during the preceding year then there is no need to compute the amount on provisional basis. The assessee will directly compute the amount to pay or reverse at the end of the financial year and will pay it by 30th June of succeeding financial year accordingly.
Exception to Rule 6(3A):
In case of a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, the amount of CENVAT credit required to be reversed or paid shall be equivalent to fifty per cent of the CENVAT Credit availed on inputs and input services in a particular month.
Compliance under Rule 6(3A):
In order to avail this option, assessee is required to submit following details to the jurisdictional Superintendent of Central Excise:
a. Intimation of choosing this option along with the details of its taxable & exempted service, date of exercising such option and the balance lying in the account of CENVAT Credit on that day.
b. At the end of the financial year, the assessee shall submit the amount of CENVAT Credit computed on provisional basis and on the actual basis and the treatment of difference between the two along with the proof of payment, if any, within 15 days from the date of payment or adjustment of CENVAT Credit account.
Miscellaneous:
a. Once an option is opted by an assessee, it shall be exercised on all the exempted goods manufactured or services provided and shall not be withdrawn during the remaining part of the financial year.
b. In terms of Rule 6(3)(ii), with respect to inputs, an assessee can maintain separate accounts for inputs used for manufacturing taxable & exempted goods and take CENVAT credit on inputs used for taxable goods. While with respect to input services, assessee can pay or reverse CENVAT Credit as provided under Rule 6(3A) ibid.
Exceptions to Rule 6 of CCR, 2004:
In certain cases, assessee can avail 100% of CENVAT Credit on inputs or input services or capital goods even if the assessee is engaged in providing exempted services or manufacturing exempted goods along with taxable services or goods. The provisions of Rule 6 shall not apply in the following cases:
a. In case the excisable goods, where goods are removed without payment of duty to:
- Cleared to a unit in SEZ or developer of SEZ, software technology park;
- Cleared for exports under bond;
- Cleared to 100% EOU;
- Cleared for Solar power generation project;
- Gold or Silver falling under the Chapter 71 of the First Schedule arising in the course of manufacture of copper or zinc;
- Supplied to UN or an international organization or foreign diplomatic missions or consular missions for their official use
b. In case of taxable services, where services are rendered without payment of service tax to a unit in SEZ or developer of SEZ or when services are exported.
c. These rules shall not apply to persons who are liable to pay service tax as service receiver under reverse charge mechanism. For example: A person is manufacturing dutiable goods and has used services by way of transportation of goods by road on which he has to pay service tax, on 25% of the total value of the service, as a service recipient. Then, he shall not be required to reverse or pay CENVAT Credit utilized for manufacturing taxable goods even though he had paid service tax on the abated value of the service.
Further, CENVAT Credit on Capital Goods is not restricted where a person is providing taxable & exempted services or manufacturing dutiable or exempted goods together. But no credit shall be allowed where assessee deals in exempted services or goods only.
Disclaimer:
This article has been prepared from the provisions of the Act, Notifications & Circulars and is solely for your better understanding of the rules & regulations and neither I suggest nor recommend any action based on the information provided above.
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