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What is
Cenvat? |
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Avoid cascading effect |
Basic purpose of Vat is to
eliminate cascading effect of taxes by tax credit system. This is done
through mechanism of input tax credit. |
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Destination Principle |
Cenvat is based on destination
principle i.e. excise duty/service tax is paid only when goods are
consumed. Till then, burden of duty gets passed on to the next
buyer/customer [In case of sales tax, as per this principle, sales tax
is payable in the State in which goods are consumed and not in the
State in which goods are produced] |
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Credit of inputs, input
services and capital goods |
Cenvat scheme allows credit of
excise duty paid on inputs goods, capital goods and service tax paid
on input services [Rule 3(1) of Cenvat Credit Rules] |
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Utilisation of Cenvat Credit |
This credit can be utilised for
payment of excise duty on dutiable final products and service tax on
taxable output services [Rule 3(4) of Cenvat Credit Rules]
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Credit only if manufacture
or provision of service |
Cenvat credit is available only
if there is ‘manufacture’ or ‘provision of taxable output service’. |
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One to one relation not required |
Cenvat Credit Rules do not require one to one
relationship [Rule 3(1) read with 3(4) of Cenvat Credit Rules] Entire
Cenvat credit is common pool which can be utilised for payment of any
eligible duty, service tax or amount. |
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Input (goods) eligible for
Cenvat credit |
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Inputs used in or in relation to manufacture |
Inputs which are used in or in relation to manufacture of taxable
final product and inputs directly used for provision of taxable output
service are eligible for Cenvat credit [Rule 2(k) of Cenvat Credit
Rules]
Input
may be used directly or indirectly in manufacture. Any input
integrally connected with manufacturing process is eligible. Process
loss is eligible. |
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Consumables eligible |
Consumables are eligible for Cenvat credit. |
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Accessories, packing material, paint |
Accessories, packing material and paints are eligible as inputs.
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LDO,
HSD and petrol not eligible |
LDO,
HSD and petrol are not eligible for Cenvat credit [Explanation 1 to
Rule 2(k) of Cenvat Credit Rules] |
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Cement, angles, channels etc. not eligible |
Input
does not include cement, angles, channels, CTD or TMT used for
construction of factory shed, building or foundation or structures to
support capital goods [Explanation 2 to Rule 2(k) of Cenvat
Credit Rules] |
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Inputs directly used for providing service |
Definition of ‘input’ is restricted for service providers. Only inputs
used directly in providing taxable service are eligible.
If
service provider charges separately for material supplied while
providing service, its cost is not includible. Correspondingly, duty
paid on such material is not Cenvatable. |
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Instant credit |
Cenvat credit on input (goods) is instant, i.e. as
soon as inputs are received in the factory. |
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Input Service |
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Input service eligible for Cenvat credit |
Cenvat credit is available of service tax paid on input services.
Definition of ‘input service’ is very wide [Rule 2(l) of Cenvat Credit
Rules]. Inclusive part of the definition expands the scope much beyond
manufacture or provision of taxable service. |
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Any service in relation to business is input service |
Decisions in Coca Cola (Bombay High Court) and ABB (LB
of CESTAT) have cleared most of doubts about interpretation of ‘input
service’ and it is clear that any relation with manufacture or
provision of taxable service is not required. any service in relation
to business of manufacturer or service provider is ‘input service’ |
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Credit only after payment of bill |
Credit of service tax on input services is available only after
payment is made of bill including service tax to service provider for
service [Rule 4(7) of Cenvat Credit Rules] |
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Input Service Distributor
and Input Credit Distributor |
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Utilisation of credit of service tax paid at HO, depots |
Service tax paid at Head Office, Regional/Branch office can be
utilised through mechanism of ‘Input Service Distributor’. They should
be registered and pass credit through invoice [Rules 2(m) and 7 of
Cenvat Credit Rules] |
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Distribution of Credit through Invoice |
The
‘Input Service Distributor’ can distribute Cenvat credit of service
tax availed by it by issuing an Invoice to its manufacturing units or
units providing output service. The invoice should have details as
required in Rule 4A(2) of Service Tax Rules. |
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Distribution can be in any ratio |
The
distribution of credit can be in any ratio. However, total credit
distributed should not be more than service tax paid on input
services. If some input service is exclusively used for
exempted final product/output service, its credit is not available for
distribution by Input Service Distributor [Rule 7]. |
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Credit of excise duty on input goods |
Input
Credit Distributor can distribute credit on duty paid on inputs
(goods) if invoice received at HO and distributed to other places
[Rule 7A of Cenvat Credit Rules]
Since
Cenvat credit can be passed through mechanism of endorsement of
invoice, this facility is not much used. |
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Capital
goods eligible for Cenvat credit |
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Capital goods eligible for
Cenvat credit |
Only capital goods as defined
in Rule 2(a) of Cenvat Credit Rules are eligible for Cenvat Credit.
Following capital
goods are covered in clause (A)(i) of above definition - Tools, hand
tools, knives etc. falling under chapter 82 * Machinery covered under
chapter 84 * Electrical machinery under chapter 85 * Measuring,
checking and testing machines etc. falling under chapter 90 * Grinding
wheels and the like, and parts thereof falling under sub-heading No
6804 * Abrasive powder or grain on a base of textile material, of
paper, of paper board or other materials, falling under chapter
heading 6805
Dumpers or tippers falling under chapter 87 are eligible as capital
goods for Cenvat credit to providers of service of Site formation and
clearance, excavation and earthmoving and demolition [section 65(105)(zzza)]
and Mining of mineral, oil or gas services [section 65(105)(zzzy)], if
these are registered in name of service provider and zre used for
providing taxable service (amendment w.e.f. 22-6-2010). Other service
providers and manufacturers are not eligible.
This definition is quite
different from ‘capital goods’ as understood in conventional
accounting or under income tax. |
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Capital goods to be used in
factory |
Capital goods should be used in
the factory of manufacturer or for provision of output service.
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Equipment or appliances used
in office not eligible to manufacturer |
Capital goods does not include
equipment or appliance used in an office of manufacturer (this
restriction does not apply to service provider) |
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Eligibility of Motor vehicles |
Motor vehicle is capital goods only in respect of
specified service providers [Rule 2(a)(B) of Cenvat Credit Rules] |
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Sending out capital goods
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Capital goods should be used in
factory. These can be sent outside for job work but should be brought
back within 180 days [Rule 4(5)(a) of Cenvat Credit Rules]
Moulds, dies, jigs and fixtures
can be sent outside without restriction of return within 180 days
[Rule 4(5)(b) of Cenvat Credit Rules |
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Partial use of capital goods
for exempted goods allowable |
Capital goods used exclusively
for manufacture of exempted goods are not eligible for Cenvat credit.
Thus, partial use for exempted goods is allowable i.e. full Cenvat
credit is available. |
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Capital goods on hire purchase/lease/loan |
Capital goods obtained on hire purchase/lease / loan are eligible
[Rule 4(3) of Cenvat Credit Rules] |
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Duty paying documents |
Duty
paying documents eligible are same for Cenvat on inputs. |
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Depreciation should not be availed on Cenvat portion |
Depreciation under section 32 of Income Tax Act should not be claimed
on the excise portion of the Capital Goods. – Rule 4(4) of Cenvat
Credit Rules (Otherwise, the manufacturer will get double deduction
for Income Tax - one credit as Cenvat and another credit as
depreciation) e.g. if cost of 'capital goods' is Rs 1.16 lakhs,
out of which Rs 0.15 lakh is duty paid, assessee can claim
depreciation under Income Tax only on Rs one lakh, if he has availed
Cenvat credit of Rs 0.16 lakh. The requirement gets satisfied only if
the assessee follows accounting procedure specified in guidelines
issued by Institute of Chartered Accountants of India |
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Credit to be availed in two instalments |
Cenvat
credit on capital goods is required to be availed in more than one
year, i.e. upto 50% credit can be availed when these are received and
balance in any subsequent financial year. The condition for taking
balance credit is that the capital goods should be in possession of
manufacturer of final products in subsequent years. SSI units can
avail entire 100% Cenvat credit in first year itself – Rule
4(2)(a) of Cenvat Credit Rules. |
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Removal of capital goods as such, after use or as scrap |
Capital goods on which Cenvat
credit was taken can be removed ‘as such’ on payment of ‘amount’ equal
to Cenvat credit availed [Rule 3(5) of Cenvat Credit Rules]
If
capital goods on which Cenvat was availed are removed as scrap, an
‘amount’ equal to duty on scrap value is payable [Rule 3(5A)
of Cenvat Credit Rules].
If capital goods are cleared
after use as second hand capital goods, ‘amount’ is payable at reduced
rate by reducing credit taken @ 2.5% per quarter. |
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Availment of Cenvat credit |
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What is ‘Cenvat Credit’ |
‘Cenvat Credit’ is a pool
of duties and taxes paid on inputs, capital goods and input services
as specified in Rule 3(1) of Cenvat Credit Rules. |
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Procurement of goods from EOU |
In respect of inputs / capital goods procured from
EOU unit, Cenvat credit is available equal to CVD and special CVD paid
and education cess and SAH education cess w.e.f. 7-9-2009 (earlier, it
was allowable as per a complicated formula) – Rule 3(7)(a) of Cenvat
Credit Rules. |
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Utilisation of Cenvat credit |
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Utilisation for any
eligible purpose |
Cenvat credit is a pool.
The credit in this pool can be utilised for payment of any excide duty
on excisable final product and service tax on taxable output service.
The credit can also be used for payment of certain ‘amounts’ [Rule
3(4) of Cenvat Credit Rules] |
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Credit only of inputs and
services received upto end of month |
Credit can be utilised
only of inputs and input services received upto end of the month
[First proviso to Rule 3(4) of Cenvat Credit Rules] (even if excise
duty/service tax is payable at a later date) |
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Inter-changeability of credit of various duties |
Credit of Basic excise duty, CVD, Special CVD and service tax can be
utilised for payment of any duty on final product or service
tax on output services, except duty payable u/s 85 of Finance Act on
pan masala and certain tobacco products [provisos to Rule 3(4)
of Cenvat Credit Rules] |
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Restrictions on interchangeability |
Cenvat Credit of education cess, NCCD and additional excise duty paid
on inputs under section 85 of Finance Act (and corresponding CVD on
imported inputs) can be utilised only for payment of corresponding
duty on final product i.e. the credit is not inter-changeable.
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Credit of special CVD |
Credit of special CVD (present rate is @ 4%) u/s 3(5) of Customs
Tariff Act can be utilised by manufacturer but not by service
providers [third proviso to Rule 3(4) of Cenvat Credit Rules] |
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Credit of education cess and SAHE cess |
Credit of education cess paid on input goods and paid on input
services is inter-changeable. Similarly, credit of SAH Education cess
paid on input goods and paid on input services is inter-changeable. |
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Duty paying document for availing Cenvat credit |
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Eligible duty/tax paying
document |
Cenvat credit can be
availed on basis of eligible duty documents as specified in Rule 9(1).
Invoice of Manufacturer,
Bill of Entry, Supplementary Invoice, Dealer’s Invoice and GAR-7
challan when service receiver is liable to pay service tax are major
eligible documents. |
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Transit Invoice |
Credit can be availed on
basis of transit invoice i.e. on basis of invoice of manufacturer when
goods purchased through dealer and name of ultimate buyer is shown as
consignee. |
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No time limit for availing
Cenvat credit |
There is no time limit for
availing Cenvat credit can be taken even after 3/4 years |
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Credit cannot be denied on
account of minor defects |
There is ample case law
that Cenvat credit cannot be denied for minor defects in duty paying
document. |
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Endorsement of duty paying
document |
Duty/tax paying document
need not be in name of the manufacturer using the input/input services
for manufacture/provision of taxable output service. It is sufficient
if these are endorsed in his name with certificate that endorser has
not availed Cenvat credit. |
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Burden of proof |
Person taking credit must
take reasonable steps while availing Credit. Burden of proof of
admissibility of Cenvat credit is on him [Rule 9(5) of Cenvat Credit
Rules] |
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Dealer’s Invoice for Cenvat |
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First stage and second stage
dealer can issue Cenvatable Invoice |
Cenvat credit can be availed on
basis of Invoice issued by dealer registered with Central Excise [Rule
9(1) of Cenvat Credit Rules]
First stage and second stage
dealer registered with Central Excise can issue Cenvatable Invoice.
First stage dealer means dealer purchasing goods from manufacturer or
his depot or consignment agent. They have to submit quarterly return
to department within 15 days from close of quarter [Rule 9(8) of
Cenvat Credit Rules] |
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Optional refund of 4%
special CVD |
If the first stage dealer
claims refund of special CVD of 4%, the buyer cannot avail Cenvat
credit. (This is not compulsory on dealer. It is optional). |
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Transit Invoice |
Transit Invoice is also
permissible. In such case, dealer need not be registered, if name of
ultimate buyer is shown as consignee in the invoice issued by
manufacturer. |
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Cenvat credit of CVD and special CVD on imported
goods |
Cenvat credit can be availed in respect of imported
goods purchased through dealer, by either issuing dealer’s invoice or
by endorsement of Bill of Entry. |
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Manufacture of Exempted as
well as taxable goods and provider of both exempted and taxable
services |
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No
credit if final product/output service exempted |
Cenvat
credit is available only if final product is dutiable or service tax
is payable on output service [Rule 6(1) of Cenvat Credit Rules]
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Options available to manufacturer of exempted as well as taxable goods
and provider of exempted and taxable services |
If
assessee is manufacturing exempted as well as dutiable goods and/or
providing taxable as well as exempt services, and availing Cenvat
credit, he has three options (a) maintain separate records of inputs
and input services used for exempt final products/services (b) If
common inputs/input services are utilised for exempted as well as
taxable final product, assessee is required to pay 5% ‘amount’ on
exempted final product or 6% ‘amount’ on exempt output services (b)
Pay amount proportionate to credit on exempted final product/output
service [Rule 6(2) and 6(3) of Cenvat Credit Rules] |
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Option cannot be changed during the year |
Option
once availed cannot be changed in the financial year. The option is to
all exempted goods/services [Explanation I to Rule 6(3) of
Cenvat Credit Rules] |
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Entire credit without proportionate reversal |
In
case of 16 services covered under Rule 6(5) of Cenvat Credit Rules,
entire Cenvat credit is available without proportionate reversal.
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Supplies to SEZ, EOU, exports, |
In case of supplies covered under Rule 6(6) of
Cenvat Credit Rules [exports, supplies to SEZ/EOU, specified
projects], entire credit is available without proportionate reversal. |
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Removal of inputs for sale
or job work |
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Removal of inputs as such |
Inputs on which Cenvat credit
was taken can be removed ‘as such’ on payment of ‘amount’ equal to
Cenvat credit availed [Rule 3(5) of Cenvat Credit Rules] |
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Sending inputs for job work |
Inputs on which Cenvat credit
was availed can be sent outside for job work. These should come back
within 180 days [Rule 4(5)(a) of Cenvat Credit Rules] |
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Direct despatch from place of job worker |
Direct despatch of final product from place of job
worker can be done with permission of AC/DC for one financial year
[Rule 4(6) of Cenvat Credit Rules] |
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Removal of waste |
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Waste is final product |
Waste is final product for
excise purposes and duty is payable as if final product is being
cleared. This applies only if waste is ‘produced’ or ‘manufactured’
and is excisable goods. |
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Waste not mentioned in
Tariff |
If a particular waste is not
mentioned in Central Excise tariff, neither any amount nor duty is
payable at the time of clearance. |
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Records and returns under
Cenvat |
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Records of Cenvat credit |
Manufacturer/service provider is required to maintain records of
inputs and capital goods, records of credit received and utilised.
[Rule 9(5) of Cenvat Credit Rules] |
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Return of Cenvat credit availed and utilised |
Returns of details of Cenvat credit availed, Principal Inputs and
utilization of Principal Inputs in forms ER-1 to ER-7 is to be
submitted [Rule 9A of Cenvat Credit Rules] |
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Revised return |
Revised return of Cenvat credit can be submitted within 60 days [Rule
9(11) of Cenvat Credit Rules] |
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Returns by dealers, input service distributor |
Dealer/service provider/input service distributor
is also required to submit returns [Rule 9(6) and 9(10) of Cenvat
Credit Rules] |
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Other provisions relating to
Cenvat |
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SSI to reverse Cenvat at end
of year |
SSI unit can opt out of Cenvat
at end of the year. He has to reverse Cenvat credit on inputs in stock
as on 31st March [Rule 11(2) of Cenvat Credit Rules] |
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SSI can take Cenvat of duty
on inputs in stock |
When he starts payment of duty
during financial year after exemption is over, he can avail Cenvat
credit of duty paid on inputs in stock |
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Simultaneous exemption |
Simultaneous exemption and
availment of Cenvat is permissible by SSI only in specified cases. |
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Cenvat credit to exporter |
Exporter of final product or
taxable services can avail Cenvat credit on inputs and input services.
He can claim refund of Cenvat credit if he cannot utilise the Cenvat
credit for payment of duty on sale made within India on payment of
duty [Rule 5 of Cenvat Credit Rules] |
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Refund of credit of input
services |
Merchant exporter can claim
refund of specified input services used while exporting final product. |
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Transfer, amalgamation of
undertaking |
If undertaking is transferred,
merged or shifted, Cenvat credit can be transferred [Rule 10 of Cenvat
Credit Rules] . |
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Penalty for improper Cenvat credit |
Penalty can be imposed for wrongfully taking or
utilising Cenvat credit [Rules 15 and 15A of Cenvat Credit Rules]
|
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Accounting for Cenvat and
stock valuation |
Accounting for Cenvat should be
as per guidance note issued by ICAI.
Inventory valuation should be
as per AS-2 which requires exclusion of Cenvat credit. However, for
income tax purposes, Cenvat credit has to be added in valuation in
view of section 145A of Income Tax Act. |
