Cenvat is a tax on value addition of goods and services. By allowing an input tax to be set off against output liability in respect of taxable goods and services, Cenvat credit seeks to do away with the cascading effects of tax on end-users of goods or services.
For example, if a service provider has paid tax on inputs, he can claim the credit of such input service tax paid and use such credit to offset the final service tax liability on the output or final service that he provides to the end-user, and thereby, reduce the tax burden on the customer.
The recent circular observed that many taxpayers had accumulated Cenvat credit balance as on April 1, 2008. The matter to be considered was whether this credit balance should be allowed to be utilised for the payment of service tax after April 1, 2008.
“As no lapsing provision was incorporated and the existing Rule 6 (3) of the Cenvat Credit Rules does not explicitly bar the utilisation of the accumulated credit, the department should not deny the utilisation of such accumulated Cenvat credit by the taxpayer after April 1, 2008. Further, it must be kept in mind that taking of credit and its utilisation is a substantive right of a taxpayer under the value-added taxation scheme. Therefore, in the absence of a clear legal prohibition, the right cannot be denied,” said the circular.
Prior to April 2008, a taxpayer was allowed to utilise credit only to the extent of 20% of the amount of service tax payable on taxable output service. After utilising credit equivalent to 20% of the output tax liability, the balance could be carried forward to the next month.
What this meant was that prior to April 1, 2008, there was no restriction in taking Cenvat credit, but only on utilisation (20%) of such credit at a given point of time, and also, there was no provision for the periodic lapse of balance credit (carry-forward balance).
However, after April 1, 2008, there was ambiguity on the use of carry-forward balance and many companies did not utilise the credit to offset the output tax liability despite having accumulated balances.
The CBEC circular not only does away with the ambiguity by making it clear that companies can use the accumulated balance completely, but the government also, through an amendment to the rules, did away with the earlier restriction on utilisation of credit to set off the output tax liability. Now, companies can utilise 100% of the carry-forward balance of accumulated Cenvat credit as on April 1, 2008, to claim credit on service tax.
“This is the correct interpretation of the law, and the industry is very appreciative about the approach of CBEC in clarifying such ambiguous situations at a time when the industries need it most,” said Sachin Menon, executive director and head of indirect tax (western region), PricewaterhouseCoopers.
“Courts have always held that entitlements such as the Cenvat credit balances cannot be lapsed, unless the Act grants powers to the executive to lapse the same. The circular from the board, issued on this principle, puts to rest the debate related to the carry forward of the Cenvat credit balances and should substantially reduce litigation,” said Uday Pimprikar, partner, tax & regulatory services, Ernst & Young.
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