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Value Addition thru Cenvat Credit -Service Tax. - CA. Madhukar N Hiregange. Introduction.

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introduction
Introduction
  • 1978- JhaComm -> 1986 Profroma Credit -> Movdat Expanded yr after yr -> 1994 Capital Goods + Dealers Passing on -> 2000 CENVAT credit-> CR- 2004 Cross sectional -> list contracted yr after yr -> 2014 - 6 Months Restriction

CA Madhukar N Hiregange

outline of cenvat credit
Outline Of Cenvat Credit
  • Cenvat Credit is a beneficial piece of legislation – unless specifically excluded – cannot be denied.
  • Final product is dutiable – Cenvat on inputs used is to be allowed as credit cannot be denied – Formica India division V/s CCE 1995 (77) E.L.T. 511 (S.C.)- Arti 265

CA Madhukar N Hiregange

utilization of cenvat credit
Utilization Of Cenvat Credit
  • All taxes and duties specified in rule 3(1) of Cenvat Credit Rules form a ‘pool’.
  • This credit can be utilised by manufacturer of excisable goods or provider of taxable service.
  • Cross utilisation
  • The credit can be used for the payment of any tax or duty as specified in rule 3(4) of Cenvat Credit Rules.
  • One to one relation not required.
capital goods rule 2 a
Capital Goods – Rule 2(a)
  • All goods falling under
  • Pollution control equipment;
  • Components, spares and accessories
  • Moulds and dies, jigs and fixtures;
capital goods rule 2 a1
Capital Goods – Rule 2(a)
  • Refractories and refractory materials
  • Tubes and pipes and fittings thereof
  • Storage tank and……
capital goods rule 2 a2
Capital Goods – Rule 2(a)
  • Motor Vehicle other than CETA 8702, 8703, 8704 & 8711 chassis (but including dumpers and tippers)
  • Used in the factory of manufacturer–equipments/appliances used in office excluded
  • Used for providing output service
  • Motor Vehicle and its components/spares/accessories– Restricted to specific purposes- motor vehicle designed for transport of goods/carry passengers etc
capital goods rule 2 a3
Capital Goods – Rule 2(a)
  • motor vehicle designed for transportation of goods including their chassis registered in the name of the SP, when used for-
  • (i) providing an output service of renting of such motor vehicle; or
  • (ii) transportation of inputs and capital goods used for providing an output service; or
  • (iii) providing an output service of courier agency;]
  • [(C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of-
  • (i) transportation of passengers; or
  • (ii) renting of such motor vehicle; or
  • (iii) imparting motor driving skills;]
when can the credit be availed on capital goods
When Can The Credit Be Availed On Capital Goods?
  • 50% on receipt of the goods in the factory on the basis of
    • Excise Invoice
    • Bill of Entry (in case of import of goods)
    • Any other documents as per Rule 9 of CCR, 2004
    • Internal records (GRN receipt note).
    • Balance in the subsequent Financial Year.
    • SSI - can avail 100% Cenvat credit on the CG
capital goods some random thoughts
Capital Goods – Some Random Thoughts
  • CGs do not include office appliances - in factory
  • Used for providing output services – SP can take such credit
  • Procured on hire purchase/lease/loan eligible for Cenvat - 4(3) of CCR, 2004.
capital goods some random thoughts1
Capital Goods – Some Random Thoughts
  • Used exclusively for exempted final products and output services - Ineligible.
  • Depreciation cannot be availed on Cenvat portion.

Eg: Cost of the capital asset - Rs.10K including duty of Rs.1K Depreciation to be claimed only on Rs.9K.

capital goods benefits
Capital Goods - Benefits
  • On spare parts credit can be taken – it is just like capital goods-what if used for providing services-AMC printers?
  • Dealer – more competition – credit will be passed on – benefit same at lesser price.
  • Credit can be taken on AC, Computer – proof– used for manufacturing purpose or providing services
  • Partial usage of capital goods – full credit available.
capital goods issues
Capital Goods – Issues
  • SSI Exemption Vs Cenvat Credit availment.
  • Capital goods not covered under specified chapter heading as per the definition-parts of the CG such as of heading 84/85??
  • Rule 6 of CCR Vs Capital Goods Credit.
input rule 2 k inclusions
Input – Rule 2(k) - Inclusions:
  • All goods used in the factory by the manufacturer of the final product
  • Any goods including accessories cleared along with the final product and goods used for providing free warranty.
  • Goods used for generation of electricity or steam for captive use also constitute inputs.
  • All goods used for providing any output service.
input rule 2 k exclusions
Input – Rule 2(k) - Exclusions:
  • Light/ high speed diesel oil, Motor spirit,-petrol
  • Any goods used for
    • Construction/execution of WC of a building/civil structure Or,
    • laying of foundation/making of structure for support of CG
    • except for provision of specified services
input rule 2 k exclusions1
Input – Rule 2(k) - Exclusions:
  • CGs except - parts and components in manufacture of final products
  • motor vehicles.
  • Goods - personal use or consumption of any employee incl. food items etc-uniforms?.
  • Goods- no relationship with manufacture of final product.
eligible inputs for service providers
Eligible Inputs For Service Providers
  • Duty paid on inputs by service provider while providing the taxable service
  • Used directly for providing taxable services
  • Chemicals/paper??
inputs benefits
Inputs - Benefits
  • Reduction in purchase cost.
  • No Cascading - From start to finish.
  • Includes cap goods-can treat as inputs + spares.
  • SSI planning.
  • Job Work Planning.
  • Initial setting up.
  • Centralized registration.
input service inclusions
Input Service - Inclusions
  • input service" means any service,-
  • (i) used by a provider of output 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 modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory /premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and 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;
input service exclusions
Input Service - Exclusions
  • Following declared services:
  • Service portion in the execution of works contract,
  • Construction services including services listed under clause (b) of section 66E of the Finance Act

in so far as they are used for

  • Construction/execution of WC of a building/civil structure/ part thereof; of
  • laying of foundation/making of structures for support of CG,

EXCEPT for the provision of one or more of the specified service.

input service exclusions1
Input Service - Exclusions

(B)Following specified services:

  • Renting of motor vehicle -
  • to extent MV is not CG
  • General insurance business, servicing, repair and maintenance

In so far as they relate to a motor vehicle which is not a capital goods

EXCEPT when used by:

  • Manufacturer of a motor vehicle.
  • Insurance company in respect of motor vehicle insured or reinsured.
input service exclusions2
Input Service - Exclusions

(C) Services such as those provided in relation to:

  • Outdoor catering,
  • Beauty treatment, health service, cosmetic and plastic surgery,
  • Membership of a club, Health and fitness centre,
  • Life insurance, Health insurance and
  • Travel benefit is 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.

as such removal of capital goods inputs rule 3 5
As Such Removal Of Capital Goods/Inputs – Rule 3(5)

Availed once the goods are received in to the factory/premises.

  • Shall pay an amount equal to the credit availed in respect of such inputs or capital goods
  • Such removal be made under cover of an invoice as per Rule 9 of CCR, 2004.

Removed as such

When inputs and capital goods are

or

After partial processing

Sale or Disposal from factory or premises

Whenever the inputs or capital goods are removed outside the premises of SP for providing the output service no payment is required

removal of capital goods after use
Removal Of Capital Goods After Use

If capital goods, on which Cenvat credit has been taken

Are removed after being used

As scrap

As capital goods

As waste

OR

OR

By a manufacturer or provider of output services

Shall pay an amount (not excise duty)

If capital goods, equal to Original Cenvat Credit taken, as reduced by prescribed percentage on the basis of number of years used

W.E.H

Equal to excise duty payable on transaction value

cenvat credit job work
Cenvat Credit – Job Work
  • Goods cleared under job work exemption are not exempted goods, as ultimately duty is paid by the principal manufacturer.
  • The job worker is permitted to use his own capital goods / inputs / input services in the job work.
  • When the job worker uses his own capital goods / inputs / input services in job work, he is entitled to take credit of duty.
  • In this case, final product should not be exempted goods.
common disputes in cenvat
Common Disputes in Cenvat
  • CENVAT credit availability on free issue of material
  • CENVAT credit availed on photocopy of invoice
  • CENVAT credit availed on courier Bill of Entry
common disputes in cenvat1
Common Disputes in Cenvat
  • CENVAT credit availed on invoice where buyer and consignee are different
  • CENVAT credit on goods directly delivered to job worker/ depot from the supplier
avoiding disputes in cenvat
Avoiding Disputes in Cenvat
  • All items checklist on eligibility, disclosure, Prompt availment, Prudence- 5% on possible personal use, valid invoice ( bank charges), system to ensure no duplication/ completeness, written clarifications in case of doubt.
  • Reconciliation &

regular verification

before/ post filing of return.

value addition under ccr 2004
Value Addition under CCR, 2004

Inputs / Input Services

  • Credit on inputs – on receipt of the inputs in the factory or on delivery to the service provider
  • Credit on input services – to be allowed on or after the receipt of the invoice or bill. On payment at times of vendor + ST. RC- on payment of ST only

CA Madhukar N Hiregange

value addition under ccr 20041
Value Addition under CCR, 2004

Inputs / Input Services

  • Time limit for availment of credit on inputs and input services – No TL at present.
  • W.e.f., 1st September 2014 - Credit on inputs or input services shall not be allowed after the expiry of six months from the date of invoice or bill.

CA Madhukar N Hiregange

value addition under ccr 20042
Value Addition under CCR, 2004

Input Services

  • Credit of tax paid on input services under RCM- Credit allowed on or after the date of payment of value of input service + service tax – Current provision

w.e.f., 1st September 2014

ST payable under RCM- credit allowed after ST payment.

ST payable under JCM- credit allowed after payment of value + ST.

CA Madhukar N Hiregange

value addition under ccr 20043
Value Addition under CCR, 2004

Input Services

  • Credit on input service to be reversed- on failure to pay value of input service + ST within 3 months.
  • Credit to be re-taken on making of payment.
  • Distribution of input service by ISD under Rule 7 of CCR, 2004- effective from 17.05.2012.

CA Madhukar N Hiregange

value addition under ccr 20044
Value Addition under CCR, 2004

Inputs

  • Removal as such - duty to be reversed on inputs.
  • Write off of inputs- duty to be reversed on inputs.
  • On remission of duty on final products u/r 21 of CER, 2002- Credit on inputs to be reversed.

CA Madhukar N Hiregange

options r 6 3
Options- R 6(3)
  • Separate Records of Inputs/ IS- actual- best
  • If not possible then:
  • 6% reversal on removal of exempted goods or provision of exempt service.
  • Separate for Inputs + IS- Proportion 3A.

CA Madhukar N Hiregange

reversal r 6 3
Reversal R 6(3)
  • Inputs – Only that used in manufacture of dutiable goods eligible.
  • Input services:

-> Exclusively used for taxable – 100%

-> Exclusively used for non taxable – 0%

-> Commonly used for taxable/ non- Proportion

-> Traded goods = SP- COGS or 10% higher is exempted. Then apply proportion

CA Madhukar N Hiregange

value addition under ccr 2004 cg
Value Addition under CCR, 2004- CG
  • To avail credit- Ownership of Capital goods not required.
  • Goods procured under HP/ lease- Credit could be availed.
  • Equipment or appliance used in an office – Not eligible unless it is part of factory or used for providing taxable services.

CA Madhukar N Hiregange

value addition under ccr 20045
Value Addition under CCR, 2004
  • Credit on “Capital goods” or “Inputs”- To be examined.
  • Only 50% of the credit allowed in the year of purchase.
  • Balance 50% credit allowed in the subsequent year.

CA Madhukar N Hiregange

value addition under ccr 20046
Value Addition under CCR, 2004
  • Restriction of availing 50% credit- do not apply to the assessees claiming SSI exemption or on removal as such.
  • Balance 50% credit allowed- subject to the possession of capital goods.
  • Exception: components, spares, accessories, moulds, tools, dies, refractories and refractory material.

CA Madhukar N Hiregange

value addition under ccr 20047
Value Addition under CCR, 2004
  • Removal of Capital Goods in the year of purchase- 100% credit allowed in the same financial year.
  • Construction of Malls- eligibility of credit on capital goods [escalators, lifts, DG sets, A/c Unit, CCTV, Fire Protection equipment .... etc]???- Judicial confirmation awaited.

CA Madhukar N Hiregange

value addition under ccr 20048
Value Addition under CCR, 2004

Capital goods exclusively used for manufacturing exempted goods or providing exempted service- Credit not eligible.

  • Partial usage of capital goods for manufacturing excisable and exempted goods, or for providing taxable and exempted service- Full credit eligible- unlike Inputs.

CA Madhukar N Hiregange

best practice availment of credit
Best Practice – Availment of Credit
  • Credits that can be availed & not availed- a list to be prepared every year- reason also- case law?.
  • Credits objected by the revenue or/ doubtful credits- to be availed but not utilised.
  • Option to pay tax and avail the credits or/ Exemption notification?- to be examined.

CA Madhukar N Hiregange

value addition under ccr 20049
Value Addition under CCR, 2004

SAD -Additional duty under section 3(5) - Service providers not eligible to take credit. No restriction for manufacturers.

  • Inputs or input services used in the manufacture of intermediate products by a job worker- Credit allowed subject to the utilisation by manufacturer for further use in relation to manufacture.

CA Madhukar N Hiregange

value addition under ccr 200410
Value Addition under CCR, 2004
  • Reverse charge and Joint charge credits- missed (as they are paid by the assessee himself).
  • Clearance of goods for direct exports- not exempt sales- Credit can be availed on inputs used for manufacture of goods cleared for direct exports.
  • Credit for inputs [beyond chap. 22], input services & capital goods- Restaurants can avail.

CA Madhukar N Hiregange

value addition under ccr 200411
Value Addition under CCR, 2004
  • Mot.veh.- allowed if used for providing output services: motor driving school, mining, transp. of passenger/ goods, construction, courier, logistics, freight forwarders or mere renting of MVs.
  • Supplies to contracts under International competitive bidding, SEZ, 100% EOU are without payment of duty- Credit can be retained.

CA Madhukar N Hiregange

value addition under ccr 200412
Value Addition under CCR, 2004
  • Inputs used as consumables in service contracts- Credit to be examined. Paper credit for photography or in study material for coaching classes.
  • Credit of duty paid on inputs and input services to be availed within six months (w.e.f., 1-09-2014)- System to be in place to ensure credits are taken.

CA Madhukar N Hiregange

value addition under ccr 200413
Value Addition under CCR, 2004
  • Exporter of Services & Goods- two refund claims to be submitted for each quarter.
  • In refund for manufacturers the method of payment of duty using cenvat has been found fastest.
  • Manufacturers claiming drawback of customs/ procure under Adv Lic + Cenvat credit refund eligible.

CA Madhukar N Hiregange

value addition under ccr 200414
Value Addition under CCR, 2004
  • Failure to file statutory returns (like ER-1, ST-3) or wrong filing of returns- Incomplete application - Refund may be denied.
  • For service providers there is a lot of delay/ red tape and use of RTI along with massive follow can only lead to a little faster realisation.

CA Madhukar N Hiregange

value addition job work
Value Addition – Job Work
  • Job workers working under Not.214/86 - Credit on consumables and capital goods/ spares can be retained.
  • Exemption to Job workers- only an option – they can avail the credit and discharge the duty on the finished goods. [Comm. v. Aries Dyechem Industries - 2014 (299) E.L.T. A88 (Guj.)]

CA Madhukar N Hiregange

value addition job work1
Value Addition – Job Work
  • Job workers can choose to pay service tax on processes not amounting to manufacture where the manufacturer can avail credit against his final duty payment.
  • There are implications of scrap to the job workers end if not returned- Quantity reconciliation are imperative.

CA Madhukar N Hiregange

value addition other aspects
Value Addition – Other Aspects
  • Reversal of credit on oral instruction of visiting officers or audit without due verification- cause issues in re credit. If being forced, to be paid under protest.
  • Dealers can also pass on cenvat credit of imported or duty paid goods selectively.
  • Proper classification of goods & services- is of utmost importance for not losing the credits.

CA Madhukar N Hiregange

value addition under ccr 200415
Value Addition under CCR, 2004
  • Exempted goods -not include the portion on which abatement claimed unless credit is restricted for both inputs as well as input services. They would also not include inputs/ input services used for export.
  • Transfer of credit in case of shifting, merger etc.

CA Madhukar N Hiregange

action prior to 1 st sep 14
Action Prior to 1st Sep- 14
  • Confirm that excess reversals not done
  • Any audits where Co has reversed credit or has not availed credit due to lack of clarity
  • Any disputes still in progress
  • Post removal credits??
  • GTA Outwards credit
  • RC/JC credits
  • Branches/ ISD credits
  • …. Could be many more

CA Madhukar N Hiregange

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