RECENT AMENDMENTS & ISSUES IN CENVAT CREDIT

Transcription

1 RECENT AMENDMENTS & ISSUES IN CENVAT CREDIT By CA RAJIV LUTHIA INDIRECT TAX REFRESHER COURSE ORGANISED BY WIRC OF ICAI On Saturday, the 20 th August, 2011 At 4 th Floor, Walchand Hirachand Hall, IMC, Churchgate, Mumbai.

2 RECENT AMENDMENTS IN CENVAT CREDIT RULES, 2004 & RELATED ISSUES Notification No.1/2011-ST dt. 01/03/2011 Amendment to Works Contract (Composition Scheme) for Payment of Service Tax, 2007 W.e.f. 1 st March,2011, Rule 3(2A) is inserted in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 whereby the CENVAT Credit is restricted to 40% of service tax paid on input services of : Erection, Commissioning or Installation (ECI) (Section 65(105)(zzd)), Commercial or Industrial Constructions (CIC) (Section 65(105)(zzq)) & Construction of Complex (COC) (Section 65(105)(zzzh)) availed by service provider opting for composition scheme. The restriction of 40% is applicable only if the input service provider has charged/collected service tax on full value of service after availing CENVAT credit of excise duty paid on inputs. The CENVAT credit in respect of input services of ECI, CIC or COC, available to service provider providing works contract service & opting for composition scheme shall be restricted to 40% in case service tax has been paid on gross value of services after availing CENVAT credit of excise duty paid on inputs by his service provider (i.e. without availing benefit of Notification No.1/2006). No such restrictions for CENVAT credit of input services for a service provider rendering WC services & not opting for composition scheme for discharging service tax liability. Issue :- 1 A Ltd. has rendered works contract services of Rs.10,000/-. They have opted to discharge service tax liability on the taxable value excluding value of material/goods transferred, VAT & service tax thereon which amounts to Rs.7,000/-. The service tax therefore is on Rs.3,000/-. They have availed the services of CIC & ECI including material for in all Rs.5,000/- on which the respective service provider has charged service Would A Ltd. be entitled to take CENVAT Credit of entire amount of tax paid on input service Rs.515/- even after insertion of Rule 3(2A)? Page 2 of 12

3 Notification No.3/2011-CE (NT) dt. 01/03/2011 Amendment to CENVAT Credit Rules, 2004 w.e.f. 1 st March,2011 Rule 3(5B) amended whereby manufacturer or service provider is required to pay amount equivalent to the CENVAT credit taken where inputs or capital goods (before being put to use) are written off fully or partially or if any provision to write off fully or partially has been made in the books of accounts. Hitherto, CENVAT credit was required to be reversed only in case of full write off or provision for full write off. Now even partial write off or provision for partial write off would be result into requirement for reversal of CENVAT Credit. Rule 6(6A) inserted whereby provision of Rule 6(1) to Rule 6(4) are not applicable in case the taxable services are provided without payment of service tax to a developer/unit of SEZ for their authorised operations. Hitherto, services rendered to developer/unit of SEZ were considered as exempt service in view of Notification No.9/2009-ST and the service provider was required to reverse CENVAT credit used for providing such services. Henceforth full CENVAT credit can now be availed in respect of inputs, capital goods & input services used in rendering output services to developer/unit of SEZ subject of fulfillment of other conditions of CCR, Notification No.3/2011-CE (NT) dt. 01/03/2011 Amendment to CENVAT Credit Rules, 2004 w.e.f. 1 st April,2011 Definition of exempted service U/r.2(e) is expanded to cover taxable services where abatement is granted with a condition for non availment of CENVAT Credit on inputs & input services. Services in respect of which benefit of Notification No.12/2003-ST dt. 20/06/2003 is availed are still outside the definition of exempted service inspite abatement is taken for value of goods sold & no credit of duty paid on inputs is taken. Even the services for which exemption is claimed under Notification No.1/2006-ST (for e.g. Outdoor Caterer, Commercial or Industrial Construction etc.) may remain outside the definition of exempted service since the condition for exemption is non availment of CENVAT Credit on inputs or capital goods or input services. Services in respect of which tax is paid under Works Contract Composition Scheme are also outside the definition of exempted service Explanation inserted to definition of exempted service U/r.2(e) to clarify that exempted service includes trading. Page 3 of 12

4 Issue :- 2 Whether this explanation is prospective or retrospective since the explanation starts with for the removal of doubts. Definition of input U/r.2(k) substituted whereby input means- (i) all goods used in the factory by the manufacturer of the final product; or (ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or (iii) all goods used for generation of electricity or steam for captive use; or (iv) all goods used for providing any output service; but excludes- (A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol; (B) any goods used for- (a) construction of a building or a civil structure or part thereof; or (b) laying of foundation or making of structures for support of capital goods, Except for the provision of any taxable service specified in sub-clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act; The above said specified services are: i) Port Services (zn) ii) Other Port Services (zzl) iii) Airport Services (zzm) iv) Commercial or Industrial Construction (zzq) v) Construction of Complex (zzzh) vi) Works Contract Services (zzzza) (C) capital goods except when used as parts or components in the manufacture of a final product; Page 4 of 12

5 (D) motor vehicles; (E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employees; and (F) any goods which have no relationship whatsoever with the manufacture of a final product. Explanation For the purpose of this clause, free warranty means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer. CENVAT credit of duty paid on goods such as cement, steel etc. used for construction of building or civil structure or laying of foundation or making structures for support of capital goods is not available to manufacturer. In case of service provider, the said CENVAT is available only to specified 6 service providers. Works contract services is one of the specified service which is eligible for CENVAT of duty paid on goods used for construction of building or civil structure or laying of foundation or making structure for support of capital goods. However, as per Rule 2A of Service Tax (Determination of Value) Rules, 2006, the value for the purpose of works contract service excludes the value of transfer of property in goods involved in the execution of works contract hence in any case, SP providing works contract service is not entitled to claim CENVAT Credit of duty paid on inputs. This has been clarified by CBEC vide Circular No.98/1/2008-ST dt. 04/01/2008. Circular No.943/04/2011-CX dated 29 th April,2011 The expression no relationship whatsoever with the manufacture of a final product must be interpreted and applied strictly and not loosely. The expression does not include any goods used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not. Only credit of goods used in the factory but having absolutely no relationship with the manufacture of final product is not allowed. Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to the manufacturing business and hence the credit of same is allowed. Issue :- 3 Can works contract service provider collect service tax on entire amount and avail CENVAT credit in respect of duty paid on inputs? The specified services do not include erection, commissioning or installation services. Does that mean ECI service provider undertaking contract of laying foundation for support of capital goods is not entitled to take CENVAT Credit of duty paid on cement, steel etc. Page 5 of 12

6 Definition of input service U/r.2(l) is substituted whereby input service means any service,- (i) Used by a provider of taxable service for providing an output service; or (ii) Used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching & training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes services,- (A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for- (a) Construction of a building or a civil structure or a part thereof; or (b) Laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or The above said specified services are: i) Architect s Services (p) ii) Port Services (zn) iii) Other Port Services (zzl) iv) Airport Services (zzm) v) Commercial or Industrial Construction (zzq) vi) Construction of Complex (zzzh) vii) Works Contract Services (zzzza) (B) specified in sub-clauses (d), (o), (zo) & (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or The above said specified services are: i) General Insurance (d) ii) Rent-a-Cab Service (o) iii) Motor Vehicle Service Station (zo) iv) Supply of Tangible Goods for Use (zzzzj) (C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic & plastic surgery, membership of a club, health & fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee. The words activities relating to business appearing in erstwhile definition are omitted nullifying the effect of landmark decisions of Hon ble Mumbai High Court in the case of Coca Cola India Pvt. Ltd. (2009) 242 ELT 168 & Ultratech Cements Ltd. (2010) TIOL 745. Page 6 of 12

7 CENVAT credit of service tax paid on services such as construction, works contract etc. used for construction of building or civil structure or laying of foundation or making structures for support of capital goods not available to manufacturer. However, the said CENVAT Credit is available to only specified 7 service providers. CENVAT credit of service tax paid on services of general insurance, rent-a-cab, motor vehicle service station & supply of tangible goods in relation to motor vehicles is not available to manufacturer. However, the same is eligible only to following service providers: 1) Courier service (Section 65(105)(f)) 2) Tour Operator service (Section 65(105)(n)) 3) Rent-a-cab services (Section 65(105)(o)) 4) Cargo Handling services (Section 65(105)(zr)) 5) Transport of Goods by Road services (Section 65(105)(zzp)) 6) Outdoor Catering services (Section 65(105)(zzt)) 7) Pandal or Shamiana Contractor s services (Section 65(105)(zzw)) No CENVAT credit of service tax paid on services such as outdoor catering, beauty treatment, health services, life insurance, health insurance etc. when such services are used primarily for personal use or consumed by employees. Circular No.943/04/2011-CX dated 29 th April,2011 The list prescribing the exclusion of CENVAT Credit in respect of specified goods & services is only illustrative and not exhaustive. No CENVAT is allowed when any goods/services are used primarily for personal use or consumption of employees. Credit of input services used for repair or renovation of factory or office is allowed. Services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, are specifically provided for in the inclusive part of the definition of input services. Rule 6(2) is substituted whereby manufacturer of dutiable as well as exempted goods or provider of taxable as well as exempted service to maintain separate accounts for receipt, consumption & inventory of inputs & input services used in relation to manufacture of dutiable as well as exempted goods & provision of taxable as well as exempted services & take CENVAT Credit only on (i) inputs used in or in relation to manufacture of dutiable goods & provision of taxable services; and (ii) input services used in or in relation to manufacture of dutiable goods and their clearance upto the place of removal & provision of taxable services. Rule 6(3) is substituted whereby manufacturer of dutiable as well as exempted goods or provider of taxable as well as exempted service opts not to maintain separate account, shall follow any one of the following options: (i) Pay an amount equal to 5% of value of exempted goods and exempted service (erstwhile 6% in case of exempted services); or (ii) Pay an amount as determined under Rule 6(3A); or (iii) Maintain separate accounts for receipt, consumption & inventory of inputs as provided in Rule 6(2)(a), take CENVAT only on inputs used in or in relation to manufacture of dutiable goods or for provision of taxable services and pay an amount as determined under Rule 6(3A) in respect of input services. Consequently, the provisions of Rule Page 7 of 12

8 6(3A)(b)(i) & (ii) & Rule 6(3A)(c)(i) & (ii) in respect of inputs shall not apply to such payment. If any abatement in respect of taxable services is granted with a condition for non availment of CENVAT Credit, the amount to be paid as per clause (i) shall be 5% of the value so exempted. Explanation III is inserted to Rule 6(2) whereby no CENVAT credit to be taken on the duty or tax paid on any goods & services that are not inputs or input services. Rule 6(3B) is inserted whereby a banking company & a financial institution including NBFC providing taxable services of Banking & Other Financial Services (Section 65(105)(zm)) to pay an amount equal to 50% of CENVAT credit availed on inputs & input services every month. Rule 6(3C) is inserted whereby service provider providing Life Insurance Services (Section 65(105)(zx)) or Management of Investments under ULIP (Section 65(105)(zzzzf)) to pay an amount equal to 20% of CENVAT credit availed on inputs & input services every month. Rule 6(3D) is inserted whereby in cases where any abatement in respect of taxable services is granted with a condition for non availment of CENVAT Credit, payment of amount under Rule 6(3) shall be deemed to be CENVAT Credit not taken for the purpose of exemption notification. Explanation I is inserted whereby In case of taxable services where option to pay tax is availed under composition scheme under Rule 6(7) (i.e. Air Travel Agents); 6(7B) (i.e. forex brokers & money changers); 6(7C) (i.e. distributors of lotteries); or Works Contract Composition Scheme the value for the purposes of Rule 6(3) & Rule 6(3A) shall be the value on which the rate of service tax when applied for calculation results in the same amount of tax as calculated under the option availed. For eg. a service provider pays service tax of Rs.4,120/- under Works Contract Composition Scheme on taxable services of Rs.1 Lac. For such service provider, value for the purpose of these rules shall be Rs.40,000/- (i.e. Rs.4,120 / 4.12 * 10.3). in case of trading, the value for the purposes of Rule 6(3) & Rule 6(3A) shall be the difference between the sale price & the cost of goods sold (determined as per the generally accepted accounting principles without including expenses incurred towards their purchases) or 10% of cost of goods sold, whichever is more. Rule 6(5) providing 100% of CENVAT Credit in respect of specified 16 services is omitted. As per Rule 6(3B), a banking company & a financial institution including NBFC providing taxable services of Banking & Other Financial Services (Section 65(105)(zm)) are required to pay an amount equal to 50% of CENVAT credit availed on inputs & input services every month irrespective of any provisions contained in Rule 6(1), 6(2) or 6(3). Requirement of paying 50% of CENVAT Credit is in respect of inputs & input services only. No such requirement in respect of capital goods. Page 8 of 12

9 Rule 6(3B) is applicable only for banking & other financial services rendered by a banking company, FI & NBFC. No such requirement in case of other service providers such as other body corporate or commercial concerns. In case of a banking company or NBFC or FI providing only taxable services (i.e. advice in relation to merger/acquisition etc.), still they are required to reverse/pay 50% of the CENVAT Credit in respect of inputs & input services. Requirement of paying 20% of CENVAT Credit U/r. 6(3C) in respect of service providers providing Life Insurance & Management of Investments under ULIP is in respect of inputs & input services only. No such requirement in respect of capital goods. Circular No.943/04/2011-CX dated 29 th April, The sub-rules 6(3B) and 6(3C) impose obligation on the entities providing banking and financial services (in case of a bank and a financial institution including a NBFC) or life insurance services or management of investment under ULIP service. The obligation is applicable independently in respect of each registration. When such a concern is exclusively rendering any other service from a registered premises, the said rules do not apply. In addition to BFS and life insurance services, if any other service is rendered from the same registered premises, the said rules will apply and due reversals need to be done. Mechanism is provided to determine value for the purposes of Rule 6(3) & 6(3A) only in respect of services where composition scheme is availed for payment of service tax. No such mechanism provided for services where abatement is claimed under Notification No.1/2006-ST. It seems that the gross amount in respect of those services is to be included inspite of the fact that tax is paid on non exempted portion. Issue :- 4 1) Madhavpura Mercantile Co-op.Bank Ltd. is a co-operative bank rendering services covered under the category of Banking & Other Financial Services. The bank earns income on account of i) interest on overdraft, ii) interest on term loan, iii) interest on cash credit, iv) interest on bill discounting, v) interest on investments, vi) profit from dealing in securities etc. The bank does not maintain separate accounts for receipt & consumption of input services used for providing output services as required under Rule 6(2) of the CENVAT Credit Rules, The bank follows the proportionate reversal method as provided in Rule 6(3)(ii) of the CCR, The bank wants to know the type of services from above mentioned categories to be treated as exempted services for the purpose of determining amount under Rule 6(3A). W.e.f. 1 st April,2011, Rule 6(3B) is inserted which provides that a banking company & a financial institution including NBFC providing taxable services of Banking & Other Financial Services (Section 65(105)(zm)) to pay an amount equal to 50% of CENVAT credit availed on inputs & input services every month. The bank is of the opinion that the said Rule 6(3B) is not applicable to them since they are registered under the Co-operative Societies Act and are neither a banking company nor a financial institution nor a NBFC. Kindly advise. Page 9 of 12

10 Issue :- 5 2) Bulls Securities Ltd. (hereinafter referred to as BSL ) is a SEBI registered Stock Broker rendering services of broking in shares & securities. BSL has set up various branch offices in India including in the State of Jammu & Kashmir. The branch at J & K caters only to those clients who are situated in the State of J & K. BSL has following incomes at the credit of their Profit & Loss A/c. i) Brokerage on securities ii) Brokerage from IPOs iii) Income from DP activities iv) Interest on investments v) Profit from trading in shares & securities on own accounts BSL has availed CENVAT Credit in respect of all the input services received at all branches except in respect of input services which have direct nexus with J & K branch since no service tax is leviable on the brokerage earned at J & K branch. a) The Superintendent of Central Excise is of the view that BSL is not entitled to utilize full CENVAT Credit and wants to apply the erstwhile restriction of utilization only upto 20% of the output service tax liability since in his opinion, the services rendered in the State of J & K are to be treated as exempted services as defined in Rule 2(e). BSL seeks your opinion. b) Vide Notification No.3/2011-CE (NT) dated 1 st March,2011, explanation is inserted to the definition of exempted service as defined in Rule 2(e) to include trading within it s ambit. BSL seeks your advice as to the applicability of this explanation on their profit earned from trading in shares & securities. BSL also wants to know the retrospective applicability of the said explanation since the same starts with for the removal of doubts. Page 10 of 12

11 Notification No.13/2011-CE (NT) dt. 31/03/2011 Amendment to CENVAT Credit Rules, 2004 w.e.f. 1 st April,2011 Rule 4(7) is substituted whereby The CENVAT Credit in respect of input service is allowed to be taken on or after the day on which the invoice/bill/challan is received. In case the liability of service tax is discharged under reverse charge mechanism, CENVAT Credit in respect of such input service is allowed on or after the day on which payment for value of input service & service tax thereon is made. In case the payment for value of input service & service tax thereon is not made within 3 months from the date of invoice/bill/challan, the manufacturer/service provider to pay an amount equal to CENVAT Credit availed on such input service. Manufacturer/service provider is entitled to take such CENVAT Credit on payment of value of input service & service tax thereon. In case where any payment towards an input service is refunded or credit note is received, manufacturer/service provider to pay an amount equal to the CENVAT Credit availed in respect of the amount refunded/credited. Such amount to be paid on or before due date for payment of excise duty/service tax. Such amount is to be paid by manufacturer/service provider on or before due date for payment of excise duty/service tax. In case manufacturer/service provider fails to pay such amount, the same is liable to be recovered along with interest & penalty as provided in Rule 14. CENVAT Credit in respect of input services, for which invoice/bill/challan is issued before 01/04/2011, is allowed on or after the day on which payment for value of input service & service tax thereon is made. Issue :- 6 i) A Ltd. availed services of XYZ management consultant. The details of entire transaction is stated herein below: Service completed & bill raised by XYZ 30 th April,2011 Payment made by A Ltd. to XYZ 5 th September,2011 CENVAT Credit is availed & utilized by A Ltd. in the month of April,2011. Since payment is not made to XYZ within 3 months, A Ltd. is required to reverse CENVAT Credit in the month of August, A Ltd. is entitled to take CENVAT Credit again in the month of September,2011 i.e. when payment is made to XYZ. Whether A Ltd. is liable for Interest U/r.14 & Penalty U/r. 15 of CCR, 2004? Page 11 of 12

12 Issue :- 7 ii) Tata Sons availed services of GTA from Golden Transport. The details of entire transaction is stated herein below: Service completed & bill raised by Golden Transport 30 th April,2011 Payment made by Tata Sons to Golden Transport 5 th December,2013 Since Tata Sons did not made payment to Golden Transport within 6 months of receipt of invoice, the Point of Taxation would be 30 th April,2011 and Tata Sons is required to make payment of service on or before 5 th May,2011. The said tax was paid by Tata Sons on 5 th November,2011 along with Interest. When Tata Sons would be eligible to take CENVAT Credit of the said tax paid? Page 12 of 12