Cenvat credit simple words

What is CENVAT Credit?

Cenvat Credit is a scheme where the manufacturers or the output service providers are allowed a set off of the taxes paid on the inputs or the input services that are used while manufacturing the final products or providing the output service.

How does it work?

In the manufacture of product X, if raw material A and raw material B are used, the manufacturer is allowed to take credit of the Central Excise duty paid on the raw materials A and B used in the manufacture of the final product X. He is allowed to use this credit while paying duty on the final product, X

Can the Cenvat Credit be availed on capital goods also?

Yes. Cenvat Credit can be availed on capital goods also. But the credit should be taken in installments. 50% of the credit in the Financial year in which the goods are received and the remaining 50% in the next financial year or subsequent years. For Capital goods received in March, 50% credit can be taken in March and the balance 50% can be taken in April as they fall under two financial years.

For taking the credit on the inputs or capital goods, is it mandatory that the goods should be directly purchased from the manufacturer?

Not always. The goods can also be procured from the dealers who are registered with the Central Excise department as first stage or second stage dealers.

What are the inputs eligible for taking the credit?

All goods, except light diesel oil, high speed diesel oil and motor spirit (petrol) which are used in or in relation to the manufacture of final products are eligible for credit.

What are the capital goods eligible for credit?

The list of eligible capital goods has been provided in the Cenvat Credit rules 2004( for e.g., goods falling under chapter headings 82,84,85 and 90 etc of the schedule to the Central Excise Tariff Act).

If these capital goods are used in the factory of the manufacturer, the credit can be availed.