FEBRUARY 29, 2016

By Jigar Doshi & Sunny Kachalia, SKP Business Consulting LLP

BUDGET 2016 aimed at rationalising the tax provisions with key focus on amending ambiguous provisions, provide assesse-friendly approach, rationalise the rates of Excise and Customs duty to boost domestic manufacturing, focus of clearing matters pending with Tribunals, etc. As regards Banks,FIs and NBFCs changes are proposed in Cenvat Credit Rules, 2004 (CCR) to redefine admissibility of credits.

An important change under CCR is with regard to Rule 6 which is revamped and replaced with new set of Rules, which would determine admissibility of credits in case the manufacturer/service provider is manufacturing exempt goods/providing exempt services. With regard to the business of Banks, FIs and NBFCs, it would be pertinent to refer Rule 6(3B) of CCR which deals with admissibility of credit for services provided by way of extending loans, deposits or advances.

The provisions which stand as of now is reproduced as below:

Notwithstanding anything contained in sub-rules (1), (2) and (3), a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, shall pay for every month an amount equal to fifty per cent. of the CENVAT credit availed on inputs and input services in that month.

From the above it would be important to note that provisions dealing with claiming proportionate credit, reversing credit at 7% is not applicable (due to notwithstanding clause) to Banks, FIs and NBFCs and Banks, FIs and NBFCs are required to reverse 50% of their credit. Though there are ambiguities whether the said provision will apply only towards income earned out of services provided of extending deposits, etc or for the entire businesses (income streams) of the Banks, FIs and NBFCs.

Proposed Rule 6(3B) is reproduced as below:

A banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, in addition to options given in sub-rules (1), (2) and (3), shall have the option to pay for every month an amount equal to fifty per cent. of the CENVAT credit availed on inputs and input services in that month.

(Effective from 1 st April 2016)

The said change would now require Banks, FIs and NBFCs to ascertain the admissibility of creditsin light of Rule 6(1), (2) and (3) of CCR or reverse 50% of the credit as per revised Rule 6 (3B). Rule 6(1), (2) and (3) of CCR are completely revamped to rationalise admissibility of credits for taxable services and have also defined the sequence for reversal of credits. The said change would give an opportunity to optimise credits for Banks, FIs and NBFCs.

Further, it would be important to note that Rule 6(3B) (present and proposed) is applicable only to Banks, FIs and NBFCs providing services by way of extending loans, deposits and advances.

Considering the amendments, it is imperative that Banks, FIs and NBFCs evaluates the entire Cenvat credit considering the net credit which can be claimed. Separately, they must also analyse the income streams to ascertain which can fall within the purview of services by way of extending deposits, loans or advances; or which can be regarded as exempt/non-taxable under Service Tax. Separately, Asset Reconstruction Companies (ARCs) which are engaged in procuring Non-Performing Assets (NPAs) and servicing them as per the provisions of SARFAESI Act, 2002 need to ascertain how the change would impact their credits considering the overall income, i.e. income which can be regarded as taxable/exempt.