Students’ Column- Cenvat Credit for Service Tax Simplified

CA LALIT MUNOYAT

1) Any government of the day requires enormous funds for the development, maintenance and growth of the economy of the country and the main source of collecting these funds is levy of taxes.  The taxation policy of the government is framed, molded and implemented is such a way that it yields optimum revenue and at the same time reduces inequalities in income across the different strata of the population, stimulate saving & investment, controls inflation  etc. Taxes may have many dimensions.

a. Forms: Income tax, wealth tax, excise duty, customs duty, VAT , service tax

b. Sources: Individual, Firm, Companies

c. Methods:

a. Progressive: Higher income- high tax; lower income-lower tax. For example the slabs of income tax @ 0% upto a minimum ,  10%, 20% , 30% , 40%, 50% depending upon the bracket of income..

b. Regressive:  Higher income-lower tax and lower income-higher tax.

c. Proportional tax : Where the rate of tax is fixed irrespective of its quantum of income or expenditure like 30% income tax on companies.

d. Degressive: It is combination of Progressive and Proportional system of taxation as under this system the tax does not increase in the same proportion as the increase in income. Progressive upto certain level and fixed thereafter. For example the slabs of income tax @ 0% upto a minimum ,  10%, 20% , and fixed on the balance income, whatever be the quantum of the balance income.

d. Point of taxation:

a. Start point: In this case tax is levied at one strategic point where the government feels to get an optimum level of tax. This system was prevalent in case of Sales Tax where sales tax was levied at the first point of sale and all subsequent transactions were tax free.

b. End Point: In this case tax is levied at the point where the goods are sold for ultimate consumption like in case of MRP based taxes.

c. Multi point : In this case tax is levied at every stage of transaction where value is added to the goods or services. The tax is levied only on the value addition and not on the entire value of the transaction. This is achieved by allowing set off of taxes paid on purchase of materials or services against the taxes payable on the sales of the material or services. This is typically called Value Added Tax System. Cenvat Credit Scheme is one of such Value Added Scheme applicable to goods and services.

2) CENVAT CREDIT SCHEME

1) The CENVAT Credit  provides for availment of the credit of the Service Tax paid on the input services/Excise duties paid on inputs/input services/capital goods.  Such credit amount can be utilized towards payment of Service Tax by an assessee on their output services.  The following example will clarify the point

	Input	Output	Balance
Gross value of services	80000	100000	20000
Add: Service Tax @ 10%	8000	10000	2000
Add: Education cess 2%	160	200	40
Add: Higher education cess 1%	80	100	20
	88240	110300	2060
Accounting Treatment	Service Tax	Edu.Cess	HE Cess
Opening Balance Credit	1000	800	500
Add: Credit on input	8000	160	80
	9000	960	580
Less: Payable on output	10000	200	100
Net Balance/Payable in Cash	-1000	760	480

a.	Rate of service tax  10%	10.00
b.	Education Cess 2% of (a)	0.20
c.	Higher Secondary education cess 1% of(a)	0.10
d.	Total rate of service tax	10.30

2)  From the above table it can be seen that the net service tax payable, including Cess is Rs. 2060/- The assessee has a total credit balance of Rs. 1240/- while the net service tax payable is Rs. 1000/- In an ideal  situation the amount of Rs. 1000/- could be set off against the total credit balance of Rs. 1240/- in the education cess  account but it is not so. The assessee will have to pay Rs. 1000/- in cash while the cess can be adjusted fully against the credit available in the cess account. This is so because the Cenvat Rules provides that the credit balance in education & higher education cess can be used for the payment of respective cess only and that it can’t be used for the payment of service tax.

3) [Take another example as per the  following table

	Input	Output	Balance
Gross value of services	80000	100000	20000
Add: Service Tax @ 10%	8000	10000	2000
Add: Education cess 2%	160	200	40
Add: Higher education cess 1%	80	100	20
	88240	110300	2060
Accounting Treatment	Service Tax	Edu.Cess	HE Cess
Opening Balance Credit	4000	0	0
Add: Credit on input	8000	160	80
	12000	160	80
Less: Payable on output	10000	200	100
Net Balance/Payable in Cash	2000	-40	-20

4) In the above case there is a credit balance in the service tax account while there is a net payable balance in the cess account. In this case the assessee can utilize the credit balance in the service tax to pay the cess of Rs. 60/- There is no restriction on utilization of service tax for the payment but not vice versa .

5) Cenvat Credit of capital goods

If a service provider has purchased capital goods for the purpose of providing output services, then the excise duty paid on the said capital goods can be taken as credit and adjusted against any service tax payable on output services. For example if a practising chartered accountant purchases a computer system from a manufacturer for use in his office for providing various consultancy services, then he can take the credit of the excise duty paid on the computer. However, there is one restriction. You can take credit equal to 50% only in the year of purchase and the balance in the subsequent year. Take an example.

		Cost	Mar-11	Mar-12
Cost of computer		300000
Add: Excise duty 8%		24000	12000	12000
Add: Education cess 2%		480	240	240
Add: Higher education cess 1%		240	120	120
		324720	12360	12360

In the above case a computer system was purchased in February 2011 and the total duty paid is Rs. 24270/- . You can take credit of Rs. 12360/- in the year ending Mar-11 and the balance Rs. 12360/- in next year Mar-12.

However if you install the computer system in your house and use it for your personal use , then cenvat credit will not be available because the computer system is not used in providing any output service. You may argue that the computer installed at home is also used for providing taxable services, in addition to his personal use and therefore credit should be allowed. The answer is no because your house is not registered premises under the service tax rules.

6) Other uses of the cenvat credit

In  addition to the use for making payment of service tax , the cenvat credit can also be used for payment of an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such without being used. However if you have used the capital goods, say computer, and after some time you propose to dispose off the computer, then shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely :-

(a)     for computers and computer peripherals :

for each quarter in the first year @ 10%

for each quarter in the second year @ 8%

for each quarter in the third year @5%

for each quarter in the fourth and fifth year @1%

For example if the computer, in our above example, is removed  after the use of for different years then the cenvat repayable will be as per (a) while the permitted use will be as per (b)

	0 year	1 year	2 year	3 year	4 year	5 year
Cenvat Credit availed Rs.	24720	60%	28%	8%	4%	0%
Removal after year(a)		14832	6922	1978	988	0
Permitted use        (b)		9888	17798	22742	23732	24720

(b)     For other capital goods @ 2.5% for each quarter. This means the reduction will be 10% each year for a period of 10 years.

7) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company.

8) The assessee shall not claim depreciation u/s 32 of the Income Tax Act on the amount of cenvat credit claimed by him. In the above example no depreciation shall be allowed on Rs. 24720/-

9) If the service provide takes the capital goods outside the registered premises for rendering taxable output services and does not bring the same to the registered premises within 180 days then the assessee shall have to pay a sum equal to the amount of cenvat credit availed by him in respect of that capital asset. However if the service provider brings back the said capital asset after 180 days , then he shall be allowed to re-avail the cenvat credit paid as above.

10)   Credit of Service Tax on the input services can be availed, only after making payment of the amount indicated in the invoice/bill/ challans. This is necessary because, the input service provider will be paying the Service Tax to the Govt. only after he realizes the payment, as the payment of Service Tax is only upon realization. The above requirement is not applicable in respect of credit of duties paid on inputs and capital goods.

11)   If a service provider avails of CENVAT credit in respect of any inputs or input services and provides such output service which are chargeable to duty or tax as well as exempted services, then, the provider of output service shall maintain separate accounts for receipt and consumption of the input service meant for use in providing taxable output service and exempted output services and take CENVAT credit only on that input service which is intended for use in providing output service on which service tax is payable.

12)   However, if the service provider opts not to maintain separate accounts for taxable and exempted services then he has two options:

a. The provider of output service shall pay an amount equal to six per cent  of value of the exempted services; OR

b. The provider of output service  shall pay an amount equivalent to the CENVAT credit attributable to input services used in, or in relation to, the provision of exempted services .

c. If the provider of output service, avails any of the above option , he shall exercise such option for all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

d. No  credit shall not be allowed on inputs and input services used exclusively for the provision of exempted service.

13)   The interest and penalty amounts cannot be taken as credit.

14)   If a provider of output service avails credit on input service and the output service is exported then the service provider is permitted to use the accumulated CENVAT credit for the payment of service tax on taxable services provided locally and even after such an adjustment the credit is not fully used, then he can file an application for refund of the accumulated input service tax credit.

15) Interest and Penalty

(i) Interest payable on arrears is 13% p.a. simple. Interest under section 75 is mandatory and automatic. The assessee is required to pay interest alongwith the service tax or before filing of service tax return. He is not supposed to wait for a show cause notice from the department. The interest is liable to computed on day to day basis.

(ii)   Penalty for failure to pay service tax – Every person liable to pay service tax but failing to pay such tax is liable to pay penalty in addition to such tax and interest payable thereon.

(iii) Minimum Penalty shall be Rs. 200/- per day or 2% per month of the amount whichever is higher subject to maximum of amount in  arrears.

For an example: –

X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays the amount on 15th March.  The default has continued for 10 days.  The penalty payable by X is computed as follows:—

2% of the amount of default for 10 days = 2 x 10, 00, 000 x 10/31= Rs. 6,451.61

Penalty calculated @ Rs. 200 per day for 10 days =Rs. 2,000

Penalty liable to be paid is Rs. 6,452.00.

16)   For a detailed study of the penal provisions, the readers are advised to my article on penal provisions under service tax published at:

https://www.taxguru.in/income-tax/faq-on-penalty-in-general-service-tax-in-particular.html+

Compiled by:

CA LALIT MUNOYAT

B.Com.(Hons.), CS, FCA, DISA

[email protected]

98201 93508

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