Highlights of Cenvat Credit Scheme

General highlights of the scheme are as follows :

Credit of duty paid on input and input services
The Cenvat scheme is principally based on system of granting credit of duty paid on inputs and input services.
A manufacturer or service provider has to pay excise duty and service tax as per normal procedure on the
basis of ‘Assessable Value’ (which is mainly based on selling price). However, he gets credit of duty paid on
inputs and service tax paid on input services. Thus, he actually pays amount equal to duty/ service tax as shown
in invoice less the Cenvat credit available to him.

Input goods eligible for Cenvat to manufacturer
Credit will be available of excise duty paid on ( a ) raw materials (excluding few items) ( b ) material used in or in
relation to manufacture like consumables etc. ( c ) Paints, packing materials, fuel etc. used for any purpose. The
input may be used directly or indirectly in or in relation to manufacture. The input need not be present in the
final product. Inputs need not be used within the factory. However, duty paid on high speed diesel oil (HSD),
Light Diesel Oil (LDO) and motor spirit (petrol) is not available as Cenvat credit, even if these are used as raw
materials or as fuel. [rule 2(k)(i) of Cenvat Credit Rules]

Input goods eligible for Cenvat to service provider
In case of service providers, only inputs used directly for providing output service are eligible for Cenvat
credit. However, high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol) are not eligible as
‘inputs’. [rule 2(k)(ii) of Cenvat Credit Rules]                                                                                                                            As per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax on goods
and materials used by him for providing output services. Normally, service tax is not payable on goods where
property is transferred to buyer. Hence, Cenvat credit will be available mainly in respect of consumables.

Inputs can be sent to job worker
Inputs can be sent to job worker for processing. These should be returned within 180 days [rule 4(5)(a)]. Final
product can be cleared directly from premises of job worker on obtaining permission of AC/DC [rule 4(6) of
Cenvat Credit Rules]

Wide definition of ‘input service’
A manufacturer/service provider will be entitled to credit of service tax paid by him which are used by him
directly or indirectly in or in relation to manufacture of final product/provision of output services. This would
include even services which are received prior to commencement of manufacture/provision of output services.
Even input services relating to setting up a factory will be eligible. In addition to this, services like advertising,
activities relating to business like accounting, auditing, storage, transport etc., which are not directly related to
manufacture/provision of out put services but are related to the sale of manufactured goods/provision of
output services would also be permitted for credit. In fact, all input services relating to all activities relating to
business are eligible for Cenvat credit. [rule 2(l) of Cenvat Credit Rules]

Services Billed/received at Head Office/Regional Offices
In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually
received in the factory (or factories) or premises of service provider. In addition, the Head Office/Regional
Offices receive services which are not specific for any factory/premises or service provider, such as advertising,
market research, management consultancy etc. Bills in respect of such services would be received only in
these offices. To enable the manufacturer/service provider to avail credit of such input services, a concept of
“input service distributor” has been introduced [rule 2(m) of Cenvat Credit Rules]
The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/
Regional Office will have to issue Invoice to the factory/office providing service. The factory/service provider
can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the
credit among various factories or service providing units. He has to ensure that the total credit allowed does
not exceed the eligible credit amount. Such offices which distribute the credit would have to obtain service tax
registration [rule 7 of Cenvat Credit Rules].

Credit of duty paid on capital goods
Capital goods (machinery, plant, spare parts of machinery, tools, dies, etc.) as defined in rule 2(a), used for
manufacture of final product and/or used for providing taxable output service will be available. Capital goods
should be used in the factory. 50% credit is available in current year and balance in subsequent financial year
or years [rule 4(2)(a) of Cenvat Credit Rules]. Assessee should not claim depreciation on duty portion on which
he has availed Cenvat credit [rule 4(4) of Cenvat Credit Rules]. A service provider can take out capital goods
from his premises, provided that he brings them back within 180 days. This period can be extended [second
proviso to Rule 3(5) of Cenvat Credit Rules]

Removal of used capital goods as scrap
If capital goods are cleared after use as scrap, an ‘amount’ equal to duty on scrap value of capital goods is
payable [rule 4(5A)]. If capital goods are removed after use (not as scarp), an ‘amount’ is payable equal to
Cenvat credit taken on the capital goods, reduced by 2.5% for each quarter of a year or part thereof, from date
of taking credit.

Credit on motor vehicles used to provide output service
Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be
allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator,cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency [rule 2(a)(B) of Cenvat Credit Rules]. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.

Credit on basis of specified documents
Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on
input services. These include Invoice of manufacturer or registered dealer, Bill of Entry, Supplementary Invoice
etc. [rule 9(1) of Cenvat Credit Rules]. If there is any defect in duty paying document, specific permission of AC/
DC is required [rule 9(2) of Cenvat Credit Rules]

Credit available instantly in case of inputs
Credit of duty on inputs can be taken up instantly, i.e. as soon as inputs reach the factory or premises of service
provider [rule 4(1) of Cenvat Credit Rules].

Cenvat credit of service tax only after bill amount plus service tax paid – In case of input services, credit is
available only after the amount of Bill value with service tax is paid to the service provider [rule 4(7) of Cenvat
Credit Rules].

Cenvat to manufacturer available only if there is ‘manufacture’ – Cenvat on inputs or input services is
available only if the process is ‘manufacture’. Otherwise, Cenvat is not available [rule 3(1) of Cenvat Credit
Rules]. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does not arise at
all].

Utilisation 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, for payment of
any tax or duty as specified in rule 3(4) of Cenvat Credit Rules.
One-to-one correlation not required – Cenvat Credit Rules do not require input-output correlation to be
established.

No input credit if final product/output service exempt from duty/ service tax
No credit is available if final product is exempt from duty or final service is exempt from service tax [rule 6(1) of
Cenvat Credit Rules]. If a manufacturer manufactures more than one product, it may happen that some of the
products are exempt from duty. Similarly, in case of service provider, some services may be taxable while
some services may not be covered. In such cases, duty paid on inputs and service tax paid on input services
used for manufacture of exempted products/services cannot be used for payment of duty or tax on other final
products/services which are not exempt from duty/tax. If the manufacturer/service provider uses common
inputs and input services both for exempted as well as un-exempted goods/services, he should maintain
separate records for inputs/input services used for manufacture of exempted final products and should not
avail Cenvat on such inputs/input services [rule 6(2) of Cenvat Credit Rules].

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,
if he is a manufacturer – Rule 6(3)(i) w.e.f. 1-4-2008.                                                                                                            (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.

Full credit in case of specified input services
In case of specified services such as construction, erection/ commissioning/ installation etc. credit would be
disallowed only when they are used exclusively in relation to manufacture of exempted goods/ services.
Otherwise full credit would be allowed [rule 6(5) of Cenvat Credit Rules]

No cash Refund, except in case of export
In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than
duty payable on final products. In such cases, though the Cenvat credit will be available to the manufacturer/
service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess
Cenvat credit. However, the only exception is in case of exports where duty paid on input material or services used for exported goods is refundable . [rule 5 of Cenvat Credit Rules].
Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong action
of the department. Refund may also be granted if assessee could not utilise credit for some other reason.

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