CENVAT CREDIT –NEW REGIME FOR INPUT AND INPUT SERVICES

[Dr. Sanjiv Agarwal]

Major changes have been brought in Cenvat Credit Rules 2004 vide Notification No. 3/2011-CE (NT) dated 1.3.2011 and Notification No. 13/2011-CE(NT) dated 31.3.2011 wef 1.4.2011.

The thrust is to make definition of input and input service more specific and achieve a more realistic attribution when common inputs and / or input services are used for manufacture of final / exempt goods or for providing taxable / exempted services.

Exempted Services

Definition of exempted services shall include taxable services which are partly exempted with the condition that no credit of input and input and input service shall be availed on such services. Exempted services will also include trading activities.

Input

‘input’ has been redefined so that –

(a)        “Input”  will include, inter-alia, all goods used in a factory by the

manufacturer and goods used for providing any output service;

(b)        Goods that shall not constitute input have been specifically excluded. These shall

include, besides petroleum items, any goods used for construction of a civil structure (by a manufacturer as well as a service provider) excepting when they are used in the provision of any of the specified construction services. Thus, goods used by a sub-contractor for rendering services of construction to the main

contractor shall constitute input.

(c )       Exclusions also cover goods such as food items, goods used in a guesthouse, residential colony, club or a recreational facility or a clinical establishment which are primarily meant for the personal use or consumption of the employees. When

any of these goods are used directly in the manufacture of final products or provision of a service they will constitute input.

(d)        Goods which have no relationship whatsoever with the manufacture have also been excluded.

Goods used for the construction of a building or civil structure or part thereof, goods used for laying of foundation or making of structures for support of capital goods are excluded from the definition of input. However, if such goods are used in providing taxable service, viz. port services, other port services, airport services, commercial or industrial construction, construction of complex, works contract, the same will be eligible goods under the category input.

Capital Goods

In case of capital goods, there is no major change in the definition except that credit of duty paid on capital goods used outside the factory for generation of electricity for captive use within the factory is allowed.

Input  Service

Definition of ‘input service’ has been substituted. Accordingly, 

(a)   The distinction between goods and services is diminishing and many goods can be received as services. Accordingly, the definition of “input service” has been aligned with the definition of “input” such that goods that do not constitute “input” do not qualify as “input service”. Thus a service relating to construction of civil structure will not constitute “input service” unless it is provided by a sub-contractor to the main contractor.

(b)   Similarly services relating to motor vehicles i.e. rent a cab, use of tangible goods, insurance or repair of vehicles shall not constitute an “input service” except in respect of output services where credit on motor vehicle is permitted as “capital goods”.

(c)   On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost to company package of the employee and are provided either free of charge or on confessional basis to company employees.

(d)   Words ‘activities relating to business’ have been deleted.

(e)   Business exhibition services and legal services have been added.

Rule 6(5) on 100% Credit no more Available

Rule 6(5) that allows full (100%) credit in respect of 16 specified services shall no longer be available. These services are –

(i)                  consulting engineer’s services,

(ii)                architect’s services,

(iii)               banking and financial services,

(iv)              forex broking services,

(v)                insurance auxiliary services,

(vi)              maintenance or repairs,

(vii)             scientific or technical consultancy services,

(viii)            security agency services,

(ix)              interior decorator services,

(x)                management consultancy services,

(xi)              real estate agent’s services,

(xii)             erection, commissioning and installation services,

(xiii)           technical testing and analysis services,

(xiv)           technical inspection and certification services,

(xv)            construction services,

(xvi)           intellectual property services. 

Construction Related Services

The following taxable services used in construction of a building or a civil structure or a part thereof or making of structures for support of capital goods shall not be treated as input services:

(a)   Architect

(b)   Port services

(c)   Other port

(d)   Airport authority

(e)   Commercial or industrial construction

(f)     Construction of complex

(g)   Works contract

Services Relating to Business

Thus, input service now does not have a general expressions ‘services relating to business’ but covers only services used by providing of taxable services for providing an output service and specifically includes the following services –

(a)   modernization, renovation or repairs of premises of service provider or its office,

(b)   advertisement or sales provisions,

(c)   market research,

(d)   storage up to place of removal,

(e)   procurement of inputs

(f)     accounting

(g)   auditing

(h)   financing

(i)      recruitment

(j)      quality control

(k)    coaching and training

(l)      computer net working

(m) credit rating

(n)   share registry

(o)   security

(p)   business exhibition

(q)   legal services, and

(r)     outward transportation upto place of removal.

Specific Exclusions

Specific exclusions from definition of input service are –

(h)   architect service, commercial constriction, construction of complex and works contracts used for construction of building or legging foundation for capital goods.

(i)      insurance, rent a cab service, servicing / repairs of vehicles and supply of tangible goods.

(j)      services of rent a cab service, outdoor catering, beauty treatment, health services, cosmetic surgery, club membership, life insurance, health insurance and travel benefits extended to employees.

Refund to SEZ

  Major changes have been made in relation to SEZ refunds .

(a)       Criteria for the determination of “wholly consumed” services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed” services.

(b)        No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed” within SEZ, including services liable to tax on reverse charge basis under section 66A.

(c)        Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover.

(d)        Suitable rule has been introduced in Cenvat Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations. New sub-rule (6A)  allow provision of services without payment of service tax to a unit in SEZ  or to a developer in SEZ for their authorized operations, without requirement of reversal of any Cenvat credit on this account. This will help in tax free receipt of services by units and developers in SEZs.

 In view of the above, it is felt  that input tax credit may further get squeezed based on present trend of input services and tax paid thereon. Those services which are not specifically included in the definition may be at a later stage disputed by the department.

 

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