04 October 2013
Every service provider is also a service receiver. For Example all the service providers have at least a Telephone in their office. They are paying service tax on the telephone charges . The service tax on telephone charges becomes a part of the cost for the service provider . When he collects service tax from the customer it becomes tax on tax which increases the actual rate of tax payment. This phenomena of tax on tax is called the cascading effect. The government does not want this to happen. Therefore the system of cenvat credit was introduced by the Government. This allows the service provider to take the credit of tax paid for the service received. Therefore the tax paid does not become part of the cost of the service provided and cascading effect is avoided. This system of taking credit on the tax paid and using the credit for the tax payable is called cenvat credit
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