MARCH 10, 2015

By Jigar Parikh, CA

IN the recent budget proposal for the year 2015-16, Notification No. 14/2015–CE and 15/2015–CE both dated 01.03.2015 have been issued exempting the levy of Education cess (EC) and Secondary & Higher Education Cess (SHEC) respectively. Till 28 th February, 2015 many of the manufacturers would have the accumulated balance in the said EC and SHEC (jointly together hereinafter referred as Cesses). However, currently no such exemption is granted under service tax and accordingly there arises disparity and the service provider are at advantageous position as they are eligible for utilisation of Cesses.

Due to immediate effect of the aforesaid notifications, there will be unused pool of Cesses in the cenvat record as well as in the books of account. By virtue of exemption, the said Cesses for now will become slow moving item for the purpose of balance sheet of a manufacturer going forward.

This is more so for the reason that under Rule 3 of Cenvat Credit Rules, 2004, the balance of Cesses can be utilised only and only for the purpose of making the payment of Cesses. In such scenario do not get tempted for writing off the Cesses! The opening balance as on 1 st March 2015 should continue to be reflected in the periodic returns filed under central excise provisions.

It is to be noted that the levy of Cesses has only become exempt and the same has not been subsumed in the basic rate of duty. Hence, those Cesses cannot otherwise be used for paying the basic duty. In such scenario, the slow-moving item i.e. Cesses will be required to be utilised as part of CENVAT credit under the following scenarios:

1. For making payment of past liability that may arise in the future during the course of audit etc. in which there will be duty as well as Cesses.

2. The inputs are removed as such on/after 1 st March 2015 and said inputs were procured before 1 March 2015; such inputs would have suffered the Cesses at the time of availing credit and accordingly‘as such 'remova lof such inputs mandates reversal of Cesses though from 1st March 2015 it has been exempted. Further, effect of such will be required to be reflected in the periodic return filed by the manufacturer.

3. The dealer / importer is required to pass on duty/Cess which has been received from the manufacturer. In the event, if the manufacturer procures goods on/after 1 st March 2015, it is likely that a dealer will issue invoice containing Cesses (2% and 1%) as well as basic duty. This could be for the reason that the dealer had procured the goods before 1 st March 2015 during which the levy of Cesses were in force and he will obviously recover the same from his customer/consignee.

4. Similarly, when goods are consigned to depot before 1 st March 2015 and cleared from depot on/after 1 st March 2015, the requisite Cesses are required to be passed on.

5. Also, during removal of capital goods after use, the Cenvat Credit Rules, 2004 prescribes a mechanism under Rule 3(5A) to compute the duty to be paid. In such cases also the Cesses are required to be reversed.

6. As per Rule 3(5B) of Cenvat Credit Rules, 2004, writing off the inputs or unused capital goods requires reversal equal to credit availed. Where the goods are procured before 1 st March 2015 is written off on/after 1 st March 2015, there arises a need to reverse the Cesses.

7. Finished goods cleared on payment of duty before 1 st March 2015 are returned for the purpose of re-made, refined or re-conditioning in the factory, the manufacturer can claim the credit on the same. If the process to which the goods being subjected to does not amount to manufacture, then as per Rule 16 of Central Excise Rules, 2002, at the time of clearance the same, manufacturer is required to pay duty equal to Cenvat credit taken earlier. This inter-alia means that Cesses are required to be paid.

8. Rule 21 of Central Excise Rules, 2002 provides for remission of duty for the goods that are not fit for market consumption or destroyed by natural cause or unavoidable accident. In such an eventuality, as per Rule 3(5C) of Cenvat Credit Rules, 2004 when the remission is granted, the manufacturer is required to reverse the cenvat credit of the input used in production of said goods and input service used in or in relation to production of said goods. Accordingly, Cesses are required to be reversed if the credit was taken with respect to input / input service.

9. A merchant exporter who has already obtained CT-1 based on the proforma invoice for which the clearance of goods will occur from factory of manufacturer on/after 1 st March, 2015, is required to cancel the CT-1 and get the fresh CT-1 issued as there will arise mismatch of duty if old CT-1 and new ARE-1 is kept on record. Similarly, transactions related to CT-3, ARE-3 will also be affected.

Thus for the aforesaid reason, it is desirable to carry forward the Cesses in the CENVAT record. Further, till the day the rate of service tax is increased to 14%, a manufacturer receiving various input services containing Cesses should continue to avail the credit of Cesses and mention the same in periodic excise returns.