Exempted Goods/Output Services

• Cenvat credit is available only if final product is dutiable.
• If assessee is manufacturing exempted as well as dutiable goods in same factory, he should maintain
separate records.
• If common inputs/input services are utilised for exempted as well as taxable final product, assessee is
required to pay 5% of value of exempted goods (if he is ‘manufacturer) and/or 6% ‘amount’ on exempted
final product.

Partial manufacture/provision of exempted products/services – Cenvat credit of inputs and input services is not
available if final product/output service is exempt from excise duty/service tax. In case of manufacturer
manufacturing both exempt and dutiable goods (or service provider providing taxable as well as exempt
services), it may happen that same inputs/input services are used partly for manufacture of dutiable goods/
taxable services and partly for exempted goods/services.
In such cases, the manufacturer/service provider has following three options (w.e.f. 1-4-2008) –
(a) Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted
goods/exempted output services – Rule 6(2) of Cenvat Credit Rules.
(b) Pay amount equal to 5% of value of exempted goods (if he is ‘manufacturer) and/or 6% of value of
exempted services (if he is service provider) if he does not maintain separate inventory and records –
Rule 6(3)(i) w.e.f. 7-7-2009.
(c) Pay an ‘amount’ equal to proportionate Cenvat credit attributable to exempted final product/ exempted
output services – Rule 6(3)(ii) w.e.f. 1-4-2008.

Cenvat credit on capital goods – If capital goods are partly used for exempted goods and party for dutiable final
products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods
is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)]

No reversal or payment of amount in certain cases – If excisable goods are removed to SEZ, EOU, EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper or zinc by smelting,
payment of 10% ‘amount’ is not required [rule 6(6)].

Cenvat credit of service tax in case of supplies made by DTA to EOU – Supplies from DTA to EOU are entitled to
Cenvat credit of service tax paid – para 6.11(v) of FTP.

Options available to manufacturer manufacturing both dutiable and exempt goods and service provider
providing taxable as well as exempt services

The manufacturer/service provider has three options

Maintain separate inventory and accounts – Maintain separate inventory and accounts of receipt and use of
inputs and input services used for exempted goods/exempted output services. In such cases, he should not
avail Cenvat credit of the inputs and input services which are used in exempted final services at all – Rule 6(2)
of Cenvat Credit Rules.

Pay 5% ‘amount’ on value of exempted goods or 6% ‘amount’ on value of exempted services if separate inventory and records not maintained – If the manufacturer/service provider opts not to maintain such separate accounts, he has to pay an amount equal to 5% of the ‘value’ of such exempted goods or 6% of the value of ‘exempted services’ [Rule 6(3)(i) w.e.f. 7-7-2009 ( Such payment can be made by debit to Cenvat credit account or PLA [explanation II to rule 6(3A)].

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted final
product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for manufacture of
exempted final products or exempted taxable services. In addition, he has to pay 5%/6% amount. Thus, the
option of payment of 5%/6% amount is not likely to be very attractive in most of the cases.
Such option has to be exercised in respect of all exempted goods manufactured and all exempted output
services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008.

Education cess and SAH education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence,
education cess or SAH education cess is not payable on such ‘amount’.

Pay proportionate amount attributable to Cenvat credit utilised for exempted final product/ exempted output
services – The manufacturer/service provider can opt to pay an ’amount’ which is proportional to Cenvat credit
availed on exempted final product/exempted output services [rule 6(3)(ii) w.e.f. 1-4-2008]

He cannot utilise Cenvat credit of inputs/input services utilised exclusively for manufacture or exempted final
product or exempted output services, as is clarified in Explanation II to rule 6(3) inserted w.e.f. 1-4-2008.

Thus, he cannot utilise Cenvat credit in respect of inputs/input services utilised exclusively for manufacture of
exempted final products or exempted taxable services. In addition, he has to pay proportionate amount relating
to exempted final products/exempted output services.

This option seems to be much better than payment of 6%/5%.

If he wants to exercise this option, he has to inform details as prescribed in rule 6(3A) of Cenvat Credit Rules to
Superintendent of Central Excise.

Such option has to be exercised in respect of all exempted goods manufactured and all exempted output
services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008.

Education cess and SAH education cess is payable only on ‘duties of excise’. ‘Amount’ is not ‘duty’. Hence,
education cess or SAH education cess is not payable on such ‘amount’.

Determination of Cenvat credit attributable to exempted final product/exempted services
If assessee intends to pay amount on proportionate basis, the ‘amount’ is to be calculated as provided in rule
6(3A) of Cenvat Credit Rules. He has to pay ‘amount’ provisionally on monthly basis. At the yearend, he has to
calculate exact amount and pay difference if any or adjust excess amount paid.

Principle behind the calculations – The mode of calculation is as follows –

Assessee should first take entire Cenvat credit of inputs and input services used in exempted as well as taxable
final products and exempted as well as taxable services. Then, at the end of month, he should calculate Cenvat
credit attributable to exempted final products and exempted services on provisional basis, as follows –

Inputs used for exempted final products (Based on his own Input/Output ratio, even in case of common inputs
like consumables etc.) + Inputs used for exempted services (On proportionate basis, based on ratio of previous
year) + Input services used for exempted final products and exempted services (On proportionate basis based
on ratio of previous year).

This amount should be reversed after end of each month. At end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and pay difference, if any, before 30th June. If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

In the first year of production or provision of services, ratios of previous year are not available. In that case, the
calculations need not be made for the whole year. However, calculations should be made after the year is over
and amount attributable to Cenvat credit on exempted final products and exempted services should be
calculated and paid.

The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations
are not easy and are prone to litigation.

There is no provision to calculate input services used exclusively for exempted services. This has to be done on
ratio basis only.

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