JUNE 28, 2009

By R Raghavendra Rao

PRESENTATION of Annual Budget is often viewed as an occasion to restructure the tariff rates, review the exemptions and imposition of new levies. But it should also be viewed as an opportunity to review the existing provisions of the law in the light of the experience gained in implementing the same and do necessary corrections for removing the bottlenecks to facilitate the smooth tax administration. Here are some simple issues in CENVAT Credit Rules 2004 which require immediate attention.

++ 10% payment under Rule 6 on exempted goods – even when the rate of duty is 8%?

The epicentre for many disputes relating to CENVAT Credit is Rule 6. In terms of Rule 6(3)(i), a manufacturer of dutiable and exempted goods not opting to maintain separate accounts has to pay an amount equal to 10% of the value of the exempted goods. This 10% formula was inserted when the excise duty rate was at 16%. The rate of duty has been gradually reduced from 16% to 8% , but unfortunately this 10% under Rule 6 has remained untouched. So, today it would be wiser and more economical for a manufacturer to pay 8% duty on the exempted goods instead of paying 10% under Rule 6. And if the exemption is absolute, may be he will face a demand notice for the remaining 2% as under Section 5A(1A), he has no choice to pay duty if the exemption is absolute.

Interestingly, there are plethora of case law wherein it was held that if the credit attributable to the inputs used in the exempted goods is reversed, there is no case for demand of 10% amount. And may be this prompted an important amendment in 2008 budget to prescribe formulae in Rule 6 to arrive at the credit attributable to the exempted goods / services. Having recognised this fact and also making it a part of the rule, it seems the 10% / 8% payment has outlived its utility and needs to be scrapped altogether. Alternatively if the same needs to be continued, the 10% amount should be reduced keeping in view of the reduction in duty rate from 16% to 8%.

++ Mining services to be included in the definition of capital goods:

Initially, separate set of rules were in existence for allowing credit for manufacturers and service providers. However, in 2004, a combined set of rules have been notified for manufacturers and output service providers. Not many modifications have been made to the definition of capital goods though the scope of taxable service has been expanded. With effect from 1.6.2007, mining service has been introduced as a separate taxable service under Section 65 (105) (zzzy). In mining service, the service providers use many capital goods, most importantly, dumpers are used for removal of the overburden etc. At present, motor vehicles registered in the name of the service providers is allowed under rule 2(a)(B) only in respect of seven services. ( courier agency, tour operator, rent a cab operator, cargo handling agency, Goods transport agency, outdoor caterer and pandal/shamiana contractor). Hence, an amendment is required to rule 2(a)(B) to include mining services also under sub-clause (zzzy) to extend the credit.

++ Penalty for irregular credit on input services – only Rs 2,000/- ?

Rule 15 of the CENVAT Credit Rules, 2004 contains the penal provisions in cases where the credit is availed irregularly. This rule has five sub-rules. Sub-rule (1) and (2) deal with quantum of penalty in respect of the credit taken on inputs or capital goods which does not exceed the excisable goods (in normal cases) and equal penalty under Section 11 AC ( for suppression, fraud etc cases). Sub-rule (3) and (4) deal with penalty in respect of input services. Sub-rule (3) reads:

++ If any person, takes CENVAT credit in respect of input services, wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person, shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees.

Thus, irrespective of the amount of irregular credit availed on the input services, the maximum penalty that can be imposed is only Rs 2,000/-. Hence this sub-rule needs to be suitably amended.

++ Inputs / Capital goods removed as such – input service credit should also be paid back? – needs clarification.

As per rule 3( 5) of the CCR, 2004,

++ When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9:

There is a view that the manufacturer is required to pay the amount of service tax credit availed in respect of the inputs / capital goods removed as such (like transportation service). This view is based on the interpretation that the words “ in respect of such inputs” used in the rule do not restrict the amount to paid to the credit availed “on such inputs”. To clear the air, a clarification needs to be issued or the sub-rule needs to be amended suitably.

(The views expressed are personal)