1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).
Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.
(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-
(i) the manufacturer of goods shall pay an amount equal to six percent. of value of the exempted goods and the provider of output service shall pay an amount equal to six percent. of value of the exempted services; In case of services by way of transportation of goods or passengers by rail, the service provider shall pay only two per cent on the value of service so exempted.
(ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specifiedin sub-rule (3A).
Explanation I.– If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.
Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.
(3A) For determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-
(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:-
(i) name, address and registration No. of the manufacturer of goods or provider of output service;
(ii) date from which the option under this clause is exercised or proposed to be exercised;
(iii) description of dutiable goods or taxable services;
(iv) description of exempted goods or exempted services;
(v) CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition;
(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-
(i) the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A;
(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services
(provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A;
(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;
From the aforesaid section, it is clear that we cannot take Cenvat input if we have used the same input for the exempted Service. What if the Service provider provides Service as well as Sell the goods,. As we know Trading of Good come in purview of Exempted Goods. If we go by Rule 3A we have to compare the taxable service and Exempted service/ goods and reverse the Cenvat credit of Exempted service/ goods proportionately. But it is really unfair to compare service income with trading income. Obviously , trading income will be on very high side as compare to Service income resulted in high reversal of Cenvat input which seems incorrect.
For removing this problem, govt has introduce Rule 6(3D)
(3D) Payment of an amount under sub-rule (3) shall be deemed to be CENVAT credit not taken for the purpose of anexemption notification wherein any exemption is granted on the condition that no CENVAT credit of inputs and input services shall be taken.
Explanation I – “Value” for the purpose of sub-rules (3) and (3A),-
(a) shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made therec under or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act, read with rules made thereunder;
(b) in the case of a taxable service, when the option available under sub-rules (7), (7A), (7B) or (7C) of rule 6 of the Service Tax Rules, 1994, has been availed, shall be the value on which the rate of service tax under section 66B of the Finance Act, read with an exemption notification, if any, relating to such rate, when applied for calculation of service tax results in the same amount of tax as calculated under the option availed; or
(c) in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including the expenses incurred towards their purchase) or ten percent of the cost of goods sold, whichever is more.
(d) in case of trading of securities, shall be the difference between the sale price and the purchase price of the securities traded or one per cent of the purchase price of the securities traded, whichever is more.
(e) shall not include the value of services by way of extending deposits, loans or advances in so far as the
Consideration is represented by way of interest or discount.
Example : Suppose A Ltd providing Taxable service as well exempted service ie trading of Goods
|1||Trading of Goods||10,50,000|
|3||Cenvat Input Available in Totality||50,000|
Calculate the Service tax payable if any according to aforesaid rules
|Service tax Working||Amount||Remarks|
|Revenue from Operations||10,50,000|
|COGS (excluding packaging and freight)||10,00,000|
|Gross Profits – A||50,000|
|10% of COGS – B||1,00,000||10 % of 10,00,000|
|Higher of A and B||1,00,000|
|Exempted Services – C||1,00,000|
|Taxable Services – D||3,00,000|
|Total services – (C+D)||4,00,000|
|Cenvat Available – F||50,000|
|CENVAT to be reversed – G||12,500|
|Cenvat available for utilisation – (F-G)||37,500|
|Service Tax payable on Taxable services||42,000||14% of Taxable service|
|Balance tax payable||4,500|
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