I guess I could afford to take at least a short cut route to history of the law because that helps in digestion of the things we need to consume. But I promise I am not going to take you through the path already shrouded with legal jargon and complexities with reference to thousands of rules and acts beset with judgment .
The whole concept started with the scheme named MODVAT ( Modified Value added tax ) which was first introduced in 1986 . The sole goal was to reduce the cascading effect , which basically means tax on taxes . As for example , lets say Mr Ram bought some raw material ,say , X at the cost of Rs 216 to manufacture a final product say Y . Central Excise duty on X and Y both say 8% . In the cost price of X out of Rs 216 Rs 16 is the Central Excise duty . Now while He sells it at Rs 270 inclusive of Excise duty which is about Rs 20 on assesable value Rs 250/- ( Raw material cost of Rs 216+ overhead Rs34/-) . Now 8% on Rs 16 Excise duty he paid while purchasing raw material is cascading effect . Its comes to about Rs 1.28 . This creates an unethical , unconstitutional and unjust enrichment to the Govt exchequer besides the fact that its effect is bound to snowball into negative growth of the industry and affect the GDP adversely . Because it is not about this quantum of extra realization by the Govt., rather its effect is far fetched As you can see from the case of Mr Ram . The erstwhile Movat scheme or even the today’s Cenvat scheme allow Mr Ram to take credit of Rs 16 that he paid while purchasing raw material . This credit now he can offset while paying duty for his final product Y , so he can sell his product for Rs 264 /- making it more competitive from his point of view and cheap from a consumer’s point of view .
Now allow me to tell you some thing about legal back bone so some viewer who might want the same as the it helps whiles referring a book on Central Excise Law or CENVAT.
CBEC inserted rules 57A to 57U in the domain of Central Excise Rules to accommodate the MODVAT credit scheme which was first introduced in 1986 . Again when Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, another set of Rules 57AA to 57AK have been introduce . Finally a separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. Cenvat Credit Rules, 2004 have been issued by superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective from 10-9-2004. With service tax coming in the horizon and making its presence felt in all segments of the society so heavily entire cenvat credit scheme gets complete dressing down . Reading of Rules becomes so complex and no wonder its gives rise to the legal over its interpretation alone.
Any way while discussing about cenvat scheme I have to mention about input service along with input all the time so its better to discuss about these terms first . As you all must be aware the input is a raw material similarly input service is a service required to manufacture a product directly or indirectly . As for example to bring the raw material to the factory we need user transport service . This transport service is essential service for the manufacture and hence may be referred as input service . And in fact transport service or GTA is the most common input service required by all manufacturers .
So the whole system of allowing credit is ingrained in the Cenvat scheme in such a manner that it can be safely be leveled with machinery for granting credit of duty paid on inputs and input services.
Eligibility Criteria
There are elaborate definition about what can be called input or input services but without going into complexities it can safely said that Credit will be available of excise duty paid on all the raw materials (excluding few items) , other material used in or in relation to manufacture like consumables etc. and paints, packing materials, fuel etc. used for any purpose which has direct or indirect relation with the manufacture of the goods with the exception of high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) in which case credit is not available even if these are used as raw materials or as fuel.
Catch line here is that the input need not be present in the final product because input may be used directly or indirectly in or in relation to manufacture. The same holds true for input service also .Similarly inputs goods are eligible for Cenvat to service provider except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol). For example let us consider an advertiser who purchased some materials , say , paints, hording stuff etc and paid central excise duty . This amount central excise duty he take as credit and put it in his register .Now while paying service tax he can use the credit he earned . He can debit the entire amount from credit he accumulated .
Now let us enter into one of the most critical and litigated area . You may aware that no credit is available if final product is exempt from duty or final service is exempt from service tax . Logic behind this rule is that if the final product exempted what is the use of the credit . But the problem area is if a manufacturer manufactures more than one product, it may happen that some of the products are exempt from duty or some services may be taxable while some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common inputs both for exempted as well as un-exempted goods/services, he should maintain separate records for inputs/input services used for manufacture of exempted final products and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted final products/services, he has to pay an ‘amount’ of 10% or 8% of price of exempted goods . However the manufacturer of goods or the provider of output service can pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services also. The Rule 6 of the Cenvat Credit Rules 2004 contains this condition . As per section 91 read with section 93 of Finance (No. 2) Act, 2004, education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence, education cess is not payable on such ‘amount’.
Credit of duty on inputs can be taken up instantly
As soon as inputs reach the factory credit can be taken instantly . Here is the extract of the portion of the Rule which covers this area .
“RULE 4. Conditions for allowing CENVAT credit. —
(1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service.”
Credit in case of capital Goods
Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available as capital goods and upto 50% credit is available in current year and balance in subsequent financial year.
Relevant portion of the Rule “(2)(a) The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year :”
No cash Refund
There is no provision for refund of the excess Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable. Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action of the department. Refund may also be granted if assessee could not utilise credit for some other reason.
Relevant portion of the Rule is given here . ” RULE [5. Refund of CENVAT credit. - Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,
(i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or
(ii) service tax on output service,
and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification :
Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Service Rules, 2005 in respect of such tax.
Provided further that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service.
Explanation : For the purposes of this rule, the words ‘output service which is exported’ means the output service exported in accordance with the Export of Services Rules, 2005.]“
Cenvat credit is indefeasible and no one to one correlation is required
The Supreme Court in CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 said ” It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.”
Credit lying in the balance is not to be treated as income to be taxed by income tax authority .
The Apex Court in the case CIT v. Indo Nippon Chemicals 155 ELT 452 said that “merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would not amount to income which is liable to be taxed under the Act. “
Send your feedback to editor@indiantaxsolutions.com