Cenvat Credit – Recent Amendments

1. Introduction

CENVAT (Central Value Added Tax) has its origin in the System of VAT (Value Added Tax). The concept of VAT was developed to avoid cascading effect of taxes.

In order to mitigate the cascading effect of taxes the Central Government introduced Proforma Credit under Rule 56A of the erstwhile Central Excise Rule 1944, which provided credit of duty paid on inputs used in the manufacture of final products. However this scheme was limited to a few inputs only.

(LAST UPDATED: 09.01.2015)

Modified system of Value added tax called “MODVAT” was introduced in 1986 Budget.

Initially Modvat Scheme was applicable only to raw material used as inputs in the manufacture of final products. However in 1994, the Scheme was extended to capital goods also by the introduction of the Central Excise Rules. Modvat was renamed as Cenvat w.e.f 1.4.2000 Vide Notfn No. 11/2000 CE (N.T) dated 1.3.2000, which introduced new Cenvat Credit Rules.

These Rules seek to introduce simplified Cenvat provisions and procedures for allowing Credit of duty paid on specified inputs and Capital goods used in or in relation to manufacture of specified final products. The credit of duty so allowed can be utilized for payment of duty leviable as final products subject to conditions laid down in the Rules.

Cenvat Credit Rules 2002 was introduced w.e.f 1.3.2002 The new rules contained full-fledged provisions for taking credit of duty paid on inputs and capital goods.

2. CENVAT Scheme

The CENVAT SCHEME is designed to reduce the cascading effect of indirect taxes on final products. This is a more liberal and extensive scheme than the erstwhile MODVAT SCHEME with most goods brought within its ambit and no declarations or statutory records.

The Scheme allows instant CENVAT Credit to be taken of duties such as Excise Duty, SED, ADE and CVD paid on inputs and capital goods received in a factory for the manufacture of any dutiable final product (except matches). This credit can be utilised to pay Excise duty on any final product. All raw materials or inputs are covered except Light Diesel oil, High Speed Diesel and Motor Spirit. Similarly, capital goods including pollution control equipment, components, spares, accessories, moulds and dies and paints, packaging material and greases/coolants are eligible goods on which credit can be availed.

Credit can be availed immediately on receipt of eligible, duty paid goods in the factory. There is no need for the manufacturer to file any declaration or obtain any permission.

In the case of Capital Goods, only 50% of the duty paid on the goods can be availed of in the same financial year; the remaining can be availed in the subsequent financial years provided the goods are still in use (except for spares and components). Further, no depreciation should be claimed by the manufacturer under Sec.32 of the Income Tax Act, 1961 on that part of the value of these Capital Goods, which is equal to the duty, paid.

A manufacturer who manufactures only exempted final products is not covered under this Scheme. However, the Scheme allows those who manufacture both dutiable and exempted final products in the same factory to avail of its benefits subject to certain conditions viz., maintenance of separate records in respect of inputs used to manufacture exempted products or payment of 8% of the total price (excluding taxes) of the exempted final products or in the case of a few specified items, on reversal of the credit availed. Similarly, credit can be availed on Capital Goods if not used exclusively for the manufacture of exempted final products.

3. Recent amendments

Time and again, changes related to cenvat credit have found its place in the budget speech and the amendments introduced in the union budget.

In Budget 2004-05, Credit Rules were introduced as a major step towards integrating the tax on goods and services.

In Budget 2011-12, amendments in the Credit Rules were introduced to make the credit regime restrictive wherein inter alia business related services, services of setting up a building or a civil structure and employee benefit related services were excluded from the ambit of credit. Such changes were proposed to achieve a more realistic balance between input credits and output tax and to harmonise the provisions of the scheme across goods and services.

In Budget 2012-13, the Negative List regime for levy of service tax was introduced and Credit Rules were amended again and the Finance Minister assured that the new approach was not a revenue augmentation measure but intended to make compliance simple and administration of service tax law easier.

As is evident from the various budget speeches and clarifications, the Credit Rules have been amended frequently sometimes with the intention to minimize cascading of taxes, providing an assessee friendly regime and aligning the cenvat credit provisions with the much awaited GST regime whereas on some occasions it has been made restrictive. However, there seems to have been an inadvertent deviation from the intended path and what has erupted is a scenario where the assessee does not know what to claim and the revenue does not know what to disallow.

The shift to Negative List based levy of service tax was inevitable considering that GST is knocking at the door of the Indian economy. The implementation of the concept of Negative List of Services has resulted in most of the activities being covered under the ambit of service tax. However, the restrictions, exceptions and limitations on availability of cenvat credit still continue.

The definition of ‘input’ and ‘input service’ as per the current credit regime, places various restrictions on availment of cenvat credit. Some of these input and input services are essential in provision of output services or under taking manufacturing activities and such restriction merely adds to the cost of the service provider or manufacturer.

The existing Credit Rules are extremely complex and the categorization into ‘inputs’, ‘capital goods’ and ‘input services’ have made the Credit Rules more perplex. Further, various provisions regarding reversal of credit and numerous restrictions on availment and utilization have only baffled the tax-payers more.

Such restrictions and limitations have steered a situation which is against the principle of value added taxation and has led to undue litigations and administrative difficulties both for the assessee and the revenue.

In GST legislations across the world, most of the expenses incurred in relation to the business are allowed as credit and can be set off against the output liability with very few inputs considered as ineligible. As a step towards the approaching GST legislation and to align the cenvat credit scheme with the Negative List regime and excise legislations, the definition of input services should be amended to allow input tax credit without any restrictions. Removal of such restrictions would result in a much needed fair and equitable credit legislation.

Further, categorizations like ‘input’, ‘input service’ and ‘capital goods’ have only added to the complexity of the credit legislation and the same may be done away with and all genuine business expenses should be allowed as credit. This will help reduce cascading of taxes as well as be a stepping stone to the assessee friendly GST regime.

Steps to be taken to ensure uninterrupted and unrestricted credit barring minimum exceptions to match the comprehensive coverage of services under the tax net.

One of the areas where change is required is the provisions regarding reversal of credit. The existing provisions and formulae are perceived not only to be extremely complex but also to an extent inimical and unfriendly. A simplified and more coherent mechanism for reversal of credit would be ease off the troubles

There are some much needed changes in the credit legislation to match the pace of the changing indirect tax legislation and to project an encouraging augury of the anticipated GST regime. What remains to be seen is to what extent the hardships of the tax-payers are resolved. One can only hope that ‘Acche Din’ comes soon!

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