Decoding Rule 6 of CENVAT Credit Rules, 2004

Courtesy: CA Ashish Gupta

THUMB RULE to avail CENVAT Credit is that it can be availed on those eligible Inputs, Capital goods or Input Services which have been utilized for providing taxable services or manufacturing dutiable goods except the cases where it is restricted under any notification. Therefore, a person engaged in rendering exempted services or manufacturing exempted goods shall not be allowed to avail any amount of CENVAT Credit. However, CENVAT Credit shall not be denied on:

  • Capital goods to SSI units availing exemptions based on the value of clearance.
  • Inputs used in the manufacture of goods cleared without payment of duty to a job worker referred to in rule 12AA of the Central Excise Rules, 2002.

In case a person is engaged in providing Taxable & Exempted service or Manufacturing Dutiable or Exempted goods together then CENVAT Credit on inputs or input services used shall be availed the manner given in Rule 6 of CCR, 2004.

Before moving towards the answer of this question, we need to understand the meaning of Exempted Goods & Exempted Services as provided in Cenvat Credit Rules, 2004.

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Following three types of Goods are covered in the aforesaid definition:

  1. Excisable goods which are exempt from whole of the duty under any exemption notification, which would otherwise be dutiable. But it does not include those goods which are not excisable at all i.e. not listed in Central Excise Tariff Act, 1958
  1. Excisable goods on which duty is charged at the NIL rate i.e. No Excise Duty is payable on such goods though mentioned in CETA.
  1. Excisable goods on which duty is reduced to 1% with a condition that CENVAT Credit on inputs or input services was not availed under N. No. 1/2011-C.E., dated 1st March, 2011 or under entries at serial numbers 67 and 128 of Notification No. 12/2012-C.E., dated 17th March, 2012.

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Following three types of Services are covered in the aforesaid definition:

  1. Any taxable service which is exempt from whole of the service tax by way of exemption notification which would otherwise be taxable. But if any activity is not a “Service” as per section 65(44) of the Act then it can not be termed as Exempted Service like a transaction in money only.
  1. Services which are listed in section 66D of the Act as Negative List of services on which no service tax is levied under section 66B of the Act shall be treated as exempted service.
  1. Services where part of it has been exempted by way of abatement with a condition that no CENVAT Credit shall be availed on input and input services used in providing such services. However, it will not cover those services where abatement benefit is available without any condition or a condition which restrict availment of CENVAT credit of either inputs or input services. For example, service tax is being levied on 30% of the Total Value of service of construction of commercial complex where money was received from customers before receipt of completion certificate from competent authority. Under this category, abatement benefit is available with a condition that no CENVAT Credit shall be available on inputs used in providing output services. Here, CENVAT Credit on input services can be availed and thus this service can not be categorised as exempted services.

 

Further, it has specifically been mentioned in this definition that it shall not include the services which are exported. Most of the time it is misunderstood that export will also be considered as exempted service for the purpose of this Rule but it has been clarified now within the definition itself.

If a person is engaged in manufacturing dutiable & exempted goods or rendering taxable & exempted services together then he has to determine and avail CENVAT Credit only on those inputs or input services which are used for providing taxable services or manufacturing dutiable goods.

In such cases there can be two following situations:

  1. Inputs or Input Services exclusively used for exempted goods or services then no CENVAT Credit shall be allowed on such items.
  1. Common input or input services have been used for both taxable and exempted output then it would be difficult for the assessee to identify the amount of CENVAT Credit that has been used for taxable output only. For such cases, law provides three rules to determine correct amount of CENVAT Credit eligible for utilization.

 

Three Rules CENVAT Credit

 

If any person is engaged in manufacturing exempted goods or rendering exempted services along with the taxable service or goods then assessee has to determine the amount of CENVAT Credit utilized for taxable goods or services. There are three options available under the following rules to do so:

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Rule 6(2) of CCR, 2004

 

The manufacturer or provider of output service for availing CENVAT Credit shall maintain separate accounts for the receipt, consumption and inventory of inputs & use of input services used:

 

(i) in or in relation to the manufacture of exempted goods;

(ii) in or in relation to manufacture of dutiable final products excluding exempted goods;

(iii) for the provision of exempted services;

(iv) for the provision of output services excluding exempted services.

 

and shall take CENVAT credit only on inputs & input services under clauses (ii) and (iv).

 

Rule 6(3)(i) of CCR, 2004

 

The manufacturer of goods or the provider of output service shall pay an amount equal to six per cent of value of the exempted goods and exempted services. In case of services by way of transportation of goods or passengers by rail, the service provider shall pay only two per cent on the value of service so exempted.

 

The amount paid under this rule shall be deemed to be CENVAT credit not taken for the purpose of exemption notification where part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs or input services shall be taken. In such cases, 6% shall be paid on the value so exempted under the notification.

 

Rule 6(3A) of CCR, 2004

 

Under this rule, an assessee shall reverse or pay the proportional amount of CENVAT credit availed, every month on provisional basis, which will be considered as utilized for the provision or manufacture of exempted service or goods respectively. Such reversal or payment shall be made by 5th of the following month or quarter as the case may be. Following formula has been prescribed for computing such amount under this rule:

Cenvat Credit* taken in a month x Value of Exempted Service or Goods manufactured or    removed during the preceding financial year

Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the preceding financial year

 

The amount computed would be the provisional amount of CENVAT Credit which shall be paid in cash or through CENVAT Credit account for all the 12 months. At the end of the financial year, the assessee shall re-compute the amount of CENVAT Credit required to be reversed or paid under this Rule for the current financial year based on the current year’s values of goods & services. Given below is the formula:

 

Cenvat Credit* taken in the year x Value of Exempted Service or Goods manufactured or removed for the current year

Total Value of Taxable & Exempted Services and Dutiable Goods manufactured & removed during the current year

 

* Cenvat Credit amount shall be excluded of the value of inputs used in or in relation of manufacture of exempted goods.

 

This amount is the actual amount of CENVAT Credit which was supposed to be reversed or paid on account of credit availed for providing exempted services or manufacturing exempted goods.

 

The assessee shall compute the difference between the provisional and the actual amount of CENVAT as computed of CENVAT reversal. In case, the amount reversed by the assessee during the Financial Year falls short of the actual amount of CENVAT Credit then he shall have to pay the balance amount by 30th June of next Financial Year. Interest @24% p.a. will be levied if payment is delayed. In case excess CENVAT Credit was reversed during the year then he will be allowed to take it back by way of debiting its CENVAT Credit balance.

 

# In case there were no output services rendered or no goods were manufactured by the assessee during the preceding year then there is no need to compute the amount on provisional basis. The assessee will directly compute the amount to pay or reverse at the end of the financial year and will pay it by 30th June of succeeding financial year accordingly.

 

Exception to Rule 6(3A):

In case of a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, the amount of CENVAT credit required to be reversed or paid shall be equivalent to fifty per cent of the CENVAT Credit availed on inputs and input services in a particular month.

Compliance under Rule 6(3A):

In order to avail this option, assessee is required to submit following details to the jurisdictional Superintendent of Central Excise:

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Miscellaneous:

 

  • Once an option is opted by an assessee, it shall be exercised on all the exempted goods manufactured or services provided by the assessee and shall not be withdrawn during the remaining part of the financial year.

 

  • In terms of Rule 6(3)(ii), with respect to inputs, an assessee can maintain separate accounts for inputs used for manufacturing taxable & exempted goods and take CENVAT credit on inputs used for taxable goods. While with respect to input services, assessee can pay or reverse CENVAT Credit as provided under Rule 6(3A) ibid.

Exceptions to Rule 6 of CCR, 2004:

100% of CENVAT Credit on inputs or input services or capital goods can be availed even if the service provider or manufacturer of goods is engaged in providing exempted services or manufacturing exempted goods along with taxable services or goods. The provisions of Rule 6 shall not apply in the following cases:

 

  • In case the excisable goods, where goods are removed without payment of duty to:
    • Cleared to a unit in SEZ or developer of SEZ, software technology park;
    • Cleared for exports under bond;
    • Cleared to 100% EOU;
    • Cleared for Solar power generation project;
    • Gold or Silver falling under the Chapter 71 of the First Schedule arising in the course of manufacture of copper or zinc;
    • Supplied to UN or an international organization or foreign diplomatic missions or consular missions for their official use

 

  • In case of taxable services, where services are rendered without payment of service tax to a unit in SEZ or developer of SEZ or when services are exported.

 

  • These rules shall not apply to persons who are liable to pay service tax as service receiver under reverse charge mechanism. For example: A person is manufacturing dutiable goods and has used services by way of transportation of goods by road on which he has to pay service tax, on 25% of the total value of the service, as a service recipient. Then, he shall not be required to reverse or pay CENVAT Credit utilized for manufacturing taxable goods even though he had paid service tax on the abated value of the service.

 

Further, CENVAT Credit on Capital Goods is not restricted where a person is providing taxable & exempted services or manufacturing dutiable or exempted goods together. But no credit shall be allowed where assessee deals in exempted services or goods only.

 

Budget-2010-Indirect Tax Proposals

Indirect Taxes

Custom & Excise.

  • The standard rate on all non-petroleum products enhanced from 8 per cent to 10 per cent ad valorem.
  • The specific rates of duty applicable to portland cement and cement clinker also adjusted upwards proportionately. Similarly, the ad valorem component of excise duty on large cars, multi-utility vehicles and sports-utility vehicles increased by 2 percentage points to 22 per cent.
  • Restore the basic duty of 5 per cent on crude petroleum; 7.5 per cent on diesel and petrol and 10 per cent on other refined products. Central Excise duty on petrol and diesel enhanced by Re.1 per litre each.
  • Some structural changes in the excise duty on cigarettes, cigars and cigarillos to be made coupled with some increase in rates. Excise duty on all non-smoking tobacco such as scented tobacco, snuff, chewing tobacco etc to be enhanced. Compounded levy scheme for chewing tobacco and branded unmanufactured tobacco based on the capacity of pouch packing machines to be introduced.

Agriculture & Related Sectors

  • Provide project import status with a concessional import duty of 5 per cent for the setting up of mechanised handling systems and pallet racking systems in ‘mandis’ or warehouses for food grains and sugar as well as full exemption from service tax for the installation and commissioning of such equipment.
  • Provide project import status at a concessional customs duty of 5 per cent with full exemption from service tax to the initial setting up and expansion of Cold storage, cold room including farm pre-coolers for preservation or storage of agriculture and related sectors produce ; and Processing units for such produce.
  • Provide full exemption from customs duty to refrigeration units required for the manufacture of refrigerated vans or trucks.
  • Provide concessional customs duty of 5 per cent to specified agricultural machinery not manufactured in India;
  • Provide central excise exemption to specified equipment for preservation, storage and processing of agriculture and related sectors and exemption from service tax to the storage and warehousing of their produce; and

• Provide full exemption from excise duty to trailers and semi-trailers used in agriculture.

  • Concessional import duty to specified machinery for use in the plantation sector to be, extended up to March 31, 2011 along with a CVD exemption.
  • To exempt the testing and certification of agricultural seeds from service tax.
  • The transportation by road of cereals, and pulses to be exempted from service tax. Transportation by rail to remain exempt.
  • To ease the cash flow position for small-scale manufacturers, they would be permitted to take full credit of Central Excise duty paid on capital goods in a single installment in the year of their receipt. Secondly, they would be permitted to pay Central Excise duty on a quarterly, rather than monthly, basis.

Environment

  • To build the corpus of the National Clean Energy Fund, clean energy cess on coal produced in India at a nominal rate of Rs.50 per tonne to be levied. This cess will also apply on imported coal.
  • Provide a concessional customs duty of 5 per cent to machinery, instruments, equipment and appliances etc. required for the initial setting up of photovoltaic and solar thermal power generating units and also exempt them from Central Excise duty. Ground source heat pumps used to tap geo-thermal energy to be exempted from basic customs duty and special additional duty.
  • Exempt a few more specified inputs required for the manufacture of rotor blades for wind energy generators from Central Excise duty.
  • Central Excise duty on LED lights reduced from 8 per cent to 4 per cent at par with Compact Fluorescent Lamps.
  • To remedy the difficulty faced by manufacturers of electric cars and vehicles in neutralising the duty paid on their inputs and components, a nominal duty of 4 per cent on such vehicles imposed. Some critical parts or sub-assemblies of such vehicles exempted from basic customs duty and special additional duty subject to actual user condition. These parts would also enjoy a concessional CVD of 4 %.
  • A concessional excise duty of 4 per cent provided to “soleckshaw”, a product developed by CSIR to replace manually-operated rickshaws. Its key parts and components to be exempted from customs duty.
  • Import of compostable polymer exempted from basic customs duty.

Infrastructure

  • Project import status to ‘Monorail projects for urban transport’ at a concessional basic duty of 5 per cent granted.
  • To allow resale of specified machinery for road construction projects on payment of import duty at depreciated value.
  • To encourage the domestic manufacture of mobile phones accessories, exemptions from basic, CVD and special additional duties are now being extended to parts of battery chargers and hands-free headphones. The validity of the exemption from special additional duty is being extended till March 31, 2011.

Medical Sector

  • Uniform, concessional basic duty of 5 per cent, CVD of 4 per cent with full exemption from special additional duty prescribed on all medical equipments. A concessional basic duty of 5 per cent is being prescribed on parts and accessories for the manufacture of such equipment while they would be exempt from CVD and special additional duty.
  • Full exemption currently available to medical equipment and devices such as assistive devices, rehabilitation aids etc. retained. The concession available to Government hospitals or hospitals set up under a statute also retained.
  • Specified inputs for the manufacture of orthopaedic implants exempted from import duty.

Infotainment

• To address the difficulties experienced by film industry in importing digital masters of films for duplication or distribution loaded on electronic medium vis-à-vis those imported on cinematographic film, owing to a differential customs duty structure, customs duty to be charged only on the value of the carrier medium. The same dispensation would apply to music and gaming software imported for duplication. In all such cases the value representing the transfer of intellectual property rights would be subjected to service tax.

  • Provide project import status at a concessional customs duty of 5 per cent with full exemption from special additional duty to the initial setting up “Digital Head End” equipment by multi-service operators.

Precious Metals

  • Rates on precious metals indexed as follows:

: On gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams

: On silver from Rs.1,000 per kg to Rs.1,500 per kg.

  • Basic customs on Rhodium – a precious metal used for polishing jewellery reduced to 2 per cent.
  • Basic customs duty on gold ore and concentrates reduced from 2 per cent ad valorem to a specific duty of Rs.140 per 10 grams of gold content with full exemption from special additional duty. Further, the excise duty on refined gold made from such ore or concentrate reduced from 8 per cent to a specific duty of Rs.280 per 10 grams.

Other Proposals

  • Full exemption from import duty available to specified inputs or raw materials required for the manufacture of sports goods expanded to cover a few more items.
  • Basic customs duty on one of key components in production of micro-wave ovens, namely magnetrons, reduced from 10 per cent to 5 per cent.
  • Value limit of Rs. 1 lakh per annum on duty-free import of commercial samples as personal baggage enhanced to Rs. 3 lakh per annum.
  • Complete exemption from special additional duty provided to goods imported in a pre-packaged form for retail sale. This would also cover mobile phones, watches and ready-made garments even when they are not imported in pre-packaged form. The refund-based exemption is also being retained for cases not covered by the new dispensation.
  • Toy balloons fully exempted from Central Excise duty.
  • Reduction in basic customs duty on long pepper from 70 per cent to 30 per cent;
  • Reduction in basic customs duty on asafoetida from 30 per cent to 20 per cent;
  • Reduction in central excise duty on replaceable kits for household type water filters other than those based on RO technology to 4 per cent;
  • Reduction in central excise duty on corrugated boxes and cartons from 8 per cent to 4 per cent;
  • Reduction in central excise duty on latex rubber thread from 8 per cent to 4 percent; and
  • Reduction in excise duty on goods covered under the Medicinal and Toilet Preparations Act from 16 per cent to 10 per cent.
  • Proposals relating to customs and central excise are estimated to result in a net revenue gain of Rs. 43,500 crore for the year.

Service Tax

  • Rate of tax on services retained at 10 per cent to pave the way forward for GST.
  • Certain services, hitherto untaxed, to be brought within the purview of the servicetax levy. These to be notified separately.
  • Process of refund of accumulated credit to exporters of services, especially in the area of Information Technology and Business Process Outsourcing, made easy by making necessary changes in the definition of export of services and procedures.
  • Accredited news agencies which provide news feed online that meet certain criteria, exempted from service tax.
  • Proposals relating to service tax are estimated to result in a net revenue gain of Rs 3,000 crore for the year.
  • Proposals on direct taxes estimated to result in a revenue loss of Rs. 26,000 crore for the year.
  • Proposals relating to Indirect Taxes estimated to result in a net revenue gain of Rs.46,500 crore for the year. Taking into account the concessions being given in the tax proposals and measures taken to mobilise additional resources, the net revenue gain is estimated to be Rs. 20,500 crore for the year.

budget update 2009- Indirect Taxes

The Finance Minister has confirmed the introduction of the Goods and Services Tax (GST) by the targeted date of 1 April 2010. It will be a dual GST comprising of a Central GST and a State GST, whereby the Centre and the respective States will legislate, levy and administer the same. Another significant proposal is the role of the Authority for Advance Rulings (AAR) constituted under the Income Tax Act, 1961 to also act as an Authority for the purposes of Customs, Central Excise and Service Tax.

SERVICE TAX

  • Legal advice, consultancy or assistance (other than appearance in courts) provided by any entity (not being an individual) to be included in the list of services chargeable to service tax.
  • Cosmetic and plastic surgery services to be included in the list of services chargeable to service tax.
  • Services provided in relation to transport of goods by rail and transport of (i) coastal goods; and (ii) goods through inland water including national waterways to be included in the list of services chargeable to service tax.
  • “Business and auxiliary service” definition to be amended to provide exemption from services provided in relation to ‘excisable goods’ under excise, thus resulting in elimination of double taxation of such services.
  • Definition of “stock broker” to be amended to exclude sub-brokers.
  • Service providers who provide services that are taxable and are exempt and do not maintain separate accounts of inputs, to be required to pay an amount equal to 6% of the value of exempted services (reduced from 8%).
  • Exemption from service tax to be provided to inter-bank purchase and sale of foreign currency between scheduled banks.
  • Two of the taxable services, namely, “Transport of goods through road” and “Commission paid to foreign agents” to be exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. Thus, an exporter will not be required to first pay the tax and later claim refund in respect of these services. However, as the present cap of 10% on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%.

CUSTOMS/ IMPORT DUTY

  • On packaged or canned software, an exemption of Additional or Countervailing Duty of Customs (CVD) to be provided on the portion of the value which represents the consideration for transfer of the right to use such value which represents the consideration for transfer of the right to use such software, subject to specified conditions.
  • A new section, section 26(A) to be introduced to the Customs Act, 1962, to provide for refund of import duty paid, on goods which are defective or not as per agreed specifications and which are returned by the buyer.
  • Provisions to be made for a High Court to condone delays in filing an appeal and filing cross objections beyond the prescribed period.
  • Section 9 of the Customs Tariff Act, 1975, to be amended retrospectively so as to extend the machinery provisions of the Customs Act, 1962, to CVD levied under this section.

CENTRAL EXCISE DUTY

  • The excise duty rate on items currently attracting 4% duty to be increased to 8% with certain exceptions such as specified food items, drugs and pharmaceutical products, medical equipment, etc.
  • High Courts to be empowered to condone delays for filing of appeals and memorandum of cross objections.
  • A manufacturer of both dutiable and exempted goods, who does not maintain separate accounts of inputs, to pay an amount equal to 5% of the total price of exempted goods (earlier 10%).
  • Chartered Accountants are now eligible for special audit as prescribed by section 14 A & 14AA

Contributed by Ca. Vinay Bhushan Sharma