Cenvat
Credit scheme is designed to avoid cascading effects but it has been
seen over a period that the government has been diluting the basic
philosophy of the rule by introducing many arbitrary restrictions. This
has been done to augment revenue without increasing the tax rates. Paper
writer has
made an attempt to analyse the restrictions and raise some
possibilities as under:
Partially using motor vehicle
for renting: Motor vehicles falling under chapter heading 8704 including
their chassis are excluded from definition of capital goods. A
manufacturer who purchases the motor vehicle for transportation of goods
could think of partially providing service of renting of such motor
vehicle charging service tax without taking abatement. This could make
the motor vehicle as capital goods eligible for taking credit.
Non
availment of exemption notification to avoid reversal of credit on
input/input service: The definition of exempted service covers those
services which are exempted from whole of duty of service tax leviable
thereon. It may be possible that a service provider has been providing
multiple services few of which could be taxable while other may be
covered by mega exemption notification. Unlike Central Excise, where it
is compulsory to avail unconditional exemption notification, there is no
such compulsion under service tax. Service provider may opt to charge
service tax and may take full credit. This decision to charge or not to
charge may be taken based on eligibility of credit to customers.
Procurement
of goods from excise dealer/endorsed invoice: A manufacturer or service
provider should try to purchase the goods directly from manufacturer or
excise dealer so that availment of credit is ensured. If it is not
possible, the vendor must be insisted to pass on the credit through
manufacturer/excise dealer invoice. Possible mechanism could be “bill to
-consigned to” basis. Alternatively, credit may also be passed on
through endorsement of manufacturer’s bill. (Gujarat HC in case of
Darshan Industries). Similar option may be examined on imported goods to
be purchased from importer also by way of endorsement.
Splitting
of works contract to avail credit on labour portion:A contract may also
be in 2 parts ( contracts). An independent contract of sale with
penalties for delayed supply, testing terms. A separate contract of
service with conditions for (no artificial splitting). Credit of service
tax charged on service bill may be taken fully as the restriction is
only for works contract and construction service in exclusion clause of
definition of input service.
Credit on goods/services used for
benefit of employees in the course of performance of their duties: Goods
and services consumed/used by employees excluded from definition of
input and input service. Credit may be taken with reversal of certain
percentage say 5-10% treating it for consumption of employees. Balance
could be said to be used in the business. e.g. mobile bills are taken in
the name of company but these would invariably be used for personal
calls by employees. Assessee may take credit of say 90% of ST treating
balance 10% as attributable to personal usage of employees.
Shifting
of place of removal to buyer premise: Outward transportation credit is
allowed upto the place of removal. Goods may be delivered FOR basis
making the buyer premise as place of removal. Credit of service tax on
expenditure incurred till that point may be taken.
Receipt of
input/capital goods by service provider at a place other than registered
premise: It is not mandatory to receive inputs/capital goods in the
premise of service provider. Could be directly sent to premise from
where services to be provided. Maintain proper documentary evidence of
location. Take credit on arrival of inputs/capital goods at that
location based on the documentary evidence of location.
Restriction
of one year on availment of credit on input/input service: Restriction
of one year from the date of invoice hasbeen imposed on availment of
credit on input/input service. (Not on capital goods) However, this may
not cover the following situations:
Rejected/ returned goods on which credit availed under Rule 16 of Central Excise Rules.
Past Credits availed and reversed under protest due to oral/ written instructions from revenue officers.
Re-credit of credit reversed for non receipt of inputs sent on job work.
Re-credit of written off/ provision made inputs when put to use.
Service Tax payable under Reverse Charge Mechanism
Possible aspects to be examined further- 1 yr restriction
Reverse
Charge Credit- Where payments are normally beyond one year, assesse may
make payment of ST under RCM and may take the credit based on such
payment. Payment to vendor not a pre-requisite for taking credit.
Delay
in payment is at times due to unhappiness of the customer/ client. Rule
6(3) of ST Rules: On input services, even where the period of one year
has elapsed, the credit can be availed where it can be proved that the
invoice was issued against a service which was not provided in whole or
part or where amount is renegotiated due to deficient provision of
service or any terms in contract. In these situations, vendor may be
asked to issue credit note for old invoice and to reissue new invoice as
per new agreed terms based on which credit may be taken.
Payment
of service tax under RCM without awaiting payment to vendor: In case of
RCM, liability to pay service tax arises at the time of making payment
to vendor. In cases where there is some dispute with vendor due to which
payment is withheld, ST may be paid under RCM even before making
payment to vendor so that interest cost on ST under RCM can be avoided.
(If tax not paid within 3 months of invoice, PoT would be immediately
after three months and delay would entail payment of interest). But if
ultimately payment made to vendor is less than original invoice amount,
there could be possibility of department questioning the excess paid
service tax.
Option under Rule 6: Rule 6 cast obligation on
manufacturer/service provider to reverse the credit attributable to
manufacture of exempted goods/provision of exempted service. Many times,
dilemma arises as to choosing a particular option. Following could be
guiding factors:
Capital Goods: Credit on Capital goods used
exclusively for manufacture or exempted goods or provision of exempted
services would not be available. Therefore if used partially for
dutiable goods/ taxable activity, the entire credit would be available.
Inputs:
Eligible inputs available only to extent used for manufacture of
dutiable goods or taxable services. If used commonly then separate usage
if possible then no credit on usage for exempted goods/ service.
Input
Services: Many issues crop up here as how to ascertain / bifurcate
usage. However cost accounting principles can be applied even in tally
environment based on square feet [ rent, housekeeping …] or number of
employees [ manpower recruitment/ supply…] or value of equipment [ AMC,
repairs to machinery..] This would in my opinion satisfy the “separate
account” criterion. Where this is not possible then the specific input
services used for exempted activity – no credit, that which is used for
only taxable- 100%. The credit which is common can be calculated as per
Rule 6(3) as to portion which is not available.
Availment
of credit of duty paid during dispute:Service receiver cannot take
credit on the basis of supplementary invoice issued by service provider
where service provider has paid service tax during legal proceedings
initiated by department. (fraud, collusion, wilful misstatement etc.).
However, there is no such restriction on service tax paid under RCM/JCM.
Here, service receiver may take the credit based on TR-6 challan
through which duty is paid even in cases of suppression etc.
The
paper writer has discussed certain aspects which may be considered by
manufacturers/ service providers to be further examined to neutralise
the restrictions imposed in the law to some extent. Whatever stand is
taken; it is suggested to intimate the department so that no allegation
of suppression etc. can be made in future.