Utilization of CESS against payment of excise duty: Whether industry has been fooled?

 In a significant move towards Goods & Service Tax (GST), the Central Government had issued Notification No. 14/2015-CE and 15/2015-CE dated 01-03-2015 (as part of the Union Budget – 2015 Notifications) whereby it exempted all goods falling under First Schedule of the Central Excise Tariff Act, 1985 (CETA) from the levy of Education Cess and Secondary and Higher Education Cess (SHE Cess) (collectively referred as CESS) respectively with immediate effect. The underlying objective of the exemption notification was indicated by the Hon’ble Finance Minister Shri Arun Jaitley during his Budget Speech in the Lok Sabha on 28-02-2015 as quoted below:

“As part of the movement towards GST, I propose to subsume the Education Cess and the Secondary and Higher Education Cess in Central Excise duty. In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%.”

The immediate, shocking but may be unintended fall out of the above notification was that the balance of cenvat credit lying in Ed. Cess and SHE Cess as on 28-02-2015 became un-utilizable and deadstock for all the manufacturers!! This is due to the restriction contained in Rule 3(7)(b) of the Cenvat Credit Rules, 2004 (hereinafter referred as CCR) which provide that cenvat credit availed on Ed. Cess/SHE Cess can be utilized only towards payment of Ed. Cess/SHE Cess respectively.

The issue was raised by various members and associations of the industry and professionals. The manufacturers were deeply concerned about the loss of huge amount of cenvat credit, lawfully availed by them before the amendment would become redundant and sought relief from this hardship inflicted upon them. The Central Government has responded positively and issued Notification No. 12/2015 – CE (NT) dated 30-04-2015, which is reproduced below for your convenience:

“2. In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 3, in sub-rule (7), in clause (b), after the second proviso, the following shall be substituted, namely:-

“Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act:

Provided also that the credit of balance fifty per cent Education Cess and Secondary and Higher Education Cess paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act:

Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act.”.

At the first glance, it appears that the Central Government has resolved all the issues raised by the industry. But in effect, this is not TRUE. The relief sought by the industry has ACTUALLY NOT been given to them. This notification is just an eye wash!! If I may be permitted, I would like to go a step further to say that the ‘industry has been fooled’ by the government.

The above notification does allow the manufacturers to utilize the cenvat credit on CESS towards payment of basic excise duty and to that extent it is welcome step. But when we minutely read the newly inserted proviso, the amendment is applicable only to CESS paid on inputs, capital goods and input services received in the factory of the manufacturer on or after 01-03-2015. Consequently, this beneficial amendment is not at all applicable to inputs, capital goods and input services received in the factory of the manufacturer upto February 28, 2015. In simple words, the industry was expecting to utilize the balance of CESS lying as on 28-02-2015 towards payment of excise duty, which is not yet possible even after the amendment of Rule 3(7)(b) of CCR. Further, the same difficulty will also be faced by the output service providers after the withdrawal of CESS on service tax from the date to be notified.

I fail to understand why a clarificatory amendment can’t be made without adding more confusion and problems. No real benefit has been extended to the industry through this notification as any clearance of inputs/capital goods made on or after March 01, 2015 is exempted from CESS. It means invoices accompanying such goods won’t have any element of CESS which can be availed and utilized against excise duty. Marginal benefit is available on inputs/capital goods in transit in case the invoicing was done before 01-03-2015 and the actual goods were received in the factory on or after 01-03-2015. However, the value of such transactions would be negligible!! Yes, some relief has come to manufacturers in case of input services as Education Cess and SHE Cess is not yet exempted on service tax. The CESS shall be abolished on service tax from a date to be notified after the enactment of Finance Bill, 2015. Till then, a manufacturer can utilize cenvat credit of CESS on input service received on or after 01-03-2015 towards payment of excise duty. So, in effect, primary concern of the manufacturers is not yet addressed and if the government is seriously serious to mitigate the hardship faced by the industry, then it should immediately make necessary amendments to allow utilization of CESS balance. Expecting prompt corrective action by the Central Govt. as our beloved Prime Sevak Shri Narendra Modi believes in ‘ease of doing business’ in India.

Till then, the only silver lining for the manufacturers is that they can continue to carry forward the un-utilized cenvat credit balance of CESS as it is perpetual and it never lapses!!! They may still utilize the same in the following situations:

1. For removal of inputs ‘as such’ upon payment/reversal of cenvat credit availed earlier on such inputs.
2. For payment of CESS on service tax in case any output service is provided by the manufacturer.
3. For payment of CESS on arrears of duty demanded for any reason.